NEW$ & VIEW$ (8 FEBRUARY 2013)

U.S. economy: so far, so good. Good January sales. Consumer credit rises. China’s meaningless stats. Euro risk is back. German stats. GDP Growth Vs Stock Returns.

Fingers crossed The fiscal drag, higher gas prices, the coming sequester all combine to threaten the recent positive momentum in the U.S. economy. So far, so good:

Retailers See Strong January

U.S. retailers are turning in strong sales for January, a time of heavy promotions to clear holiday goods and make way for early spring merchandise. Gap’s same-store sales were up 8% and Macy’s surged 12%.

The 18 retailers tracked by Thomson Reuters posted 5.8% growth in January same-store sales, or sales at stores open over a year.

Part of the reason for continued good sales is higher borrowing:

Student, Auto Loans Surge, as Credit-Card Debt Shrinks  Borrowing by U.S. consumers rose in December for a fifth consecutive month, driven by a surge in student and auto loans, in a sign that consumers are more comfortable about making big spending decisions.

Consumer credit, a measure of lending that excludes home mortgages, rose by $14.6 billion to a seasonally adjusted $2.778 trillion, a Federal Reserve report showed Thursday.

The advance was due to a $18.2 billion increase in nonrevolving credit, which includes student loans and auto financing. It was the largest monthly increase since November 2001, when those loans grew by $20.75 billion.

Revolving credit, which mainly consists of credit-card debt, declined by $3.6 billion in December to $849.8 billion.

Pointing up  Use of non-revolving credit lines continued quite strong and rose $18.2B, the fifth consecutive double-digit monthly rise. The y/y increase of 8.3% was its strongest since late-2002.



Steven Hansen of Global Economic Intersection posted this chart showing how higher borrowings helped sustain spending in recent months (this data series does not include mortgages):


Smile  Jobless Claims Decline

The number of U.S. workers filing first-time applications for unemployment benefits fell by 5,000 to a seasonally adjusted 366,000 last week, signaling a modestly improving labor market.

A more-reliable gauge of claims—the four-week moving average, which smooths out week-to-week volatility—fell by 2,250 to 350,500. The average level of claims hasn’t been that low since March 2008. (Chart from Haver Analytics)

Plate  McDonald’s January sales down 1.9 percent, worse than expected

McDonald’s Corp said on Friday that January sales at established hamburger restaurants around the world fell 1.9 percent, as fast-food chains fight hard for diners, who continue to spend cautiously due to lackluster economic growth in most major markets.


Chinese stats should always be regarded with suspicion. This is even more true in the first quarter of any year due to the shifting holidays of the Chinese New Year. So be cautious with Chinese data over the next 3 months. It is better to aggregate the monthly results and compare them with last year’s data. The Chinese New Year begins Feb. 5 this year vs Jan. 23 in 2012. It effectively added five more working days to January compared to the same period last year.

Inflation Eases in China

The main measure of consumer inflation eased to 2% in January, after a 2.5% rise in December from a year earlier. Non-food CPI was +1.6% vs +1.7% Y/Y in December.

Pointing up  January’s CPI rose 1.0% M/M.

Wholesale prices fell 1.6% in January from a year earlier, compared with a 1.9% year-on-year drop in December, but they are expected to pick up soon as warmer weather leads to more construction activity. On a month-on-month basis, the PPI reversed a dropping trend to grow 0.2 percent in January, according to the bureau.



China Exports

Exports climbed 25% after a 14.1% rise in December, while imports jumped 28.8%, well ahead of the previous month’s 6.0% increase, according to customs data. According to the customs agency’s own calculation, exports were up 12.4% on an adjusted basis, while imports rose 3.4%.

Morning MarketBeat: Remember Europe?

(…) This week has brought Europe’s ills back into focus, and has put at least a temporary damper on the Dow Jones Industrial Average’s indomitable march toward a new record high.

Let’s start with Italy, where there are two big dramas playing out. The first is the return of perennial prime minister Silvio Berlusconi. His center-right coalition may throw Italy’s shaky economy into turmoil if it does well in elections later this month, signaling a possible reversal of the reforms put in place by the outgoing prime minister, Mario Monti.

The other drama surrounds Italy’s third-largest lender, the 541-year old Monte dei Paschi di Siena. The bank is at the center of a complex criminal probe over purported secret loans from the Bank of Italy in 2011 after MPS had exhausted all other means of getting cash.

Then there’s Spain, where the party of Prime Minister Mariano Rajoy is embroiled in a scandal over alleged kickbacks and calls for his resignation are getting noisy. The last thing this recession-plagued nation needs is political upheaval. (…)

Europe’s leader descended on Brussels Thursday for the beginning of a meeting to try and hammer out a seven-year budget, with all the familiar splits— north vs. south, growth vs. austerity, France vs. Germany—on display. Expect the usual Byzantine maneuverings—and keep an eye on that Spanish 10-year.

Yesterday, U.S. equities dropped along with Euro bourses. After these closed, U.S. markets recovered most of their morning losses. Bespoke Investment has these 3 charts revealing the risk that U.S. stocks might be dragged down by European woes:

German Industrial sector shrinks at fastest pace since 2009

Manufacturing output in Germany is falling at the fastest quarterly rate since early 2009, according to official data which are now confirming the downbeat messages from gloomy business surveys. However, those same surveys are now indicating a revival of the sector as we move into 2013.

imageAlthough data from the Federal Statistics Office showed output rose 0.2% in December, revisions to back data means that the sector is experiencing a strong downward trend in production. Over the fourth quarter as a whole, manufacturing output was down 3.1%, the largest three-month fall since May 2009.

The wider measure of industrial production, which includes construction and energy production, also fell at a steep rate in the fourth quarter. A 3.0% drop compared to the third quarter was likewise the steepest rate of decline seen since May 2009.

The steepness of the decline in production in part reflects pay-back from a surprisingly strong third quarter, which saw manufacturing output rise 0.7% and industrial production increase by 0.9%. The business surveys, such as the PMI, had in contrast indicated that output had fallen during over the summer.

Rainbow The weakness of the recent official production data therefore point to an element of catch-up with the business surveys. However, while the surveys gave an advance indication in the summer of impending economic weakness, some comfort can be drawn from the recent upturn in those surveys, which point to a strengthening of the manufacturing sector at the start of 2013. The PMI survey showed manufacturers reporting the strongest monthly increase in production since September 2011.

The first quarter is therefore starting off to be a far better one for the German manufacturing sector than the final three months of last year. (Markit)

I must tamper the enthusiasm with this comment from Markit’s German PMI for January:

Production levels were supported by a stabilisation of new order intakes during January, which contrasted with the sharp fall seen in the previous month. This in part reflected greater support from domestic demand, as new business from abroad dropped marginally at the start of 2013. That said, the latest decrease in new export orders was much slower than in December, with some firms suggesting that improved demand from Asia had helped partially offset lower new business volumes from clients in southern Europe. (…)

Staffing levels in the manufacturing sector decreased for the fourth month running in January, despite stronger trends in output and new business. Moreover, the pace of job shedding accelerated to its fastest since July 2012, reflecting lower workforce numbers in all three market groups monitored by the survey.

German retail PMI also suggests caution:

Actual sales in the German retail sector fell short of initial targets during January, as has been the case in each month since April 2012. Moreover, the degree to which sales were lower than expected was the most marked for one year. Retailers also anticipate that sales will continue to disappoint during the month ahead.

And this morning:

Decline in construction activity continues in January

January PMI data showed a continued contraction in overall German construction activity, although also signalled improved trends in a number of key areas.

Rates of decline in activity and new orders slowed since December, while the rate of job losses eased to only a marginal pace. Expectations regarding the year-ahead outlook for output levels were also
higher. Businesses meanwhile faced both a further deterioration in vendor performance and rising purchasing costs, despite substantially reducing their demand for materials over the month.

The ongoing downturn in German construction activity stretched to ten months in January, with the Purchasing Managers’ Index® (PMI®) – a single figure snapshot of overall activity in the construction economy – posting at 47.7. This was up on December’s ten-month low of 43.3, however, signalling a reduction in the overall pace of contraction. (…)

German trade data show consumers still reluctant to spend

Both exports and imports fell in December compared to their levels a year earlier, reflecting weakness in Europe’s largest economy in the fourth quarter, which is expected to improve this year. (…) exports to eurozone partners fell by 2.1 per cent while imports rose by 0.7 per cent last year.

European auto sector stabilises in January

Having undergone the steepest downturn since the height of the financial crisis last year, January PMI® data for the European automobiles industry raised the likelihood of a recovery in business conditions within
the sector in early-2013.

Although new orders continued to fall, the rate of decline was the weakest since last February and output was broadly stable. The Markit EU Automobiles & Parts Output Index rose for the sixth successive month, to a level broadly consistent with no change in production since December. The latest figure was the second-highest in the past 16 months. (…)

Data for new business suggest that exports helped to support workloads in January, reflecting in particular rising demand in Asian markets for European marques. This contrasts with 2010-11, when domestic markets
provided the main source of demand as European governments introduced incentive schemes for motorists to scrap older models.

Although output stabilised, auto manufacturers continued to shed staff in January. The current sequence of decline in employment in the sector now stretches to ten months. (Markit)


In all, what we are witnessing in Europe is an improving second derivative for most data. The ship is still sinking, but at a slower pace. Not a green shoot yet. Hence this:

Draghi’s Remarks Damp Euro

European Central Bank President Mario Draghi on Thursday said the euro’s rise may damp the central bank’s inflation outlook, suggesting the ECB could take action to stimulate the economy if the currency’s strength further undermines growth prospects.


EU leaders near €960bn budget deal
Hawks prevail as spending set to be cut for first time

If approved, the budget, which covers the seven-year period from 2014 to 2020, would be about 3 per cent less than the current long-term budget and represent the first ever decline in EU spending.

It would be a sharp cut from the €1,033bn first proposed by the European Commission, the EU’s executive arm, at the outset of negotiations. (…)

High five  But in an ominous warning of trouble ahead, Martin Schulz, president of the European parliament, said his institution might yet reject it.

“The further we step away from the commission’s proposed figures, the more likely the proposal will be rejected,” he said, adding that MEPs were “extremely sceptical”.

Light bulb  GDP Growth Unrelated to Stock Returns

Economists and most strategists spend much time forecasting GDP growth, linking their market strategy to their economic crystal ball. Jeremy Grantham has this chart that should free them from this boring chore of forecasting economic growth.


This is shown for the last 30 years only and for developed countries only, but in earlier work (which can be found on our website1) we went back a hundred years for some developed countries and looked at emerging country equity markets as well and all had the same negative correlations.

We know, although many often forget, that equity prices = earnings x P/E. Grantham goes one step further with this next chart that reveals a negative correlation between real earnings growth and real GDP growth.


Not that economy watching is useless. Just that the actual growth rates have little to do with equity returns. Understanding the drivers and the momentum in the economy and how they differ from expectations is far more useful.


NEW$ & VIEW$ (11 JANUARY 2013)

Airplane  I am travelling on the U.S. West coast. During the next 10 days, posting will be more limited and impacted by Pacific time…Clock

Trade Deficit Widens The U.S. trade gap widened by 15.8% to $48.73 billion in November as imports of products like cellphone increased.

U.S. imports were up 3.8% to $231.28 billion, with increased shipments of cell phones and related goods alone accounting for a fifth of the overall gain.

U.S exports were up 1% to $182.55 billion in November. Sales of foods, feeds and beverages fell slightly while selling of capital goods such as telecommunications equipment rose marginally.

Wells Fargo Profit Rises as Bank Boosts Lending  Wells Fargo & Co., the largest U.S. home lender, reported a 24 percent rise in fourth-quarter earnings as the bank extended more credit. The shares slipped as margins narrowed and mortgage applications waned.

AmEx to Cut 8.5% of Staff

American Express plans to cut 5,400 jobs in its biggest retrenchment in a decade, as the company pares back its travel business that has been hammered by the rise of Internet-based hotel- and airfare-reservation services

Long-Term Jobless Begin to Find Work

The epidemic of long-term unemployment, one of the most pernicious and persistent challenges bedeviling the U.S. economy, is finally showing signs of easing.

The long-term unemployed—those out of work more than six months—made up 39.1% of all job seekers in December, according to the Labor Department, the first time that figure has dropped below 40% in more than three years.

The problem is far from solved. Nearly 4.8 million Americans have been out of work for more than six months, down from a peak of more than 6.5 million in 2010 but still a level without precedent since World War II.

Rare Sight in California: A Surplus

California is predicting a surplus for its next fiscal year, in a turnaround from the steep deficits of recent times, as cost cuts, tax increases and an improving economy have started to put the state on firmer financial footing.

China’s Inflation Accelerates as Chill Boosts Food Prices  China’s inflation accelerated more than forecast to a seven-month high as the nation’s coldest winter in 28 years pushed up vegetable prices, a pickup that may limit room for easing to support an economic recovery.

The consumer price index rose 2.5 percent in December from a year earlier, the National Bureau of Statistics said today in Beijing. That compares with a 2 percent gain in November. The decline in the producer-price index eased to 1.9 percent.

Pointing up  Cash Floods Into U.S. Stock Funds

Cash poured into U.S. stock funds at a blistering pace in the latest week, as investors flocked into equities after a yearlong rally and an early-January jump.

For the week ended Wednesday, investors sent $18 billion into stock funds and exchange-traded funds. The biggest week in 2012 saw $11.4 billion in inflows.

For all of 2012, stock funds and ETFs picked up a net of just $3 billion, though weekly inflows at times easily topped that figure. This week’s inflow marks the biggest weekly cash influx since June 2008 and the fourth-largest inflow since 2000, according to Bank of America Merrill Lynch.


NEW$ & VIEW$ (10 DECEMBER 2012)


The Labor Department’s latest job-market overview showed employers added 146,000 jobs in November. That is better than the previous two months, which were revised down, but still too weak to get many of America’s 4.8 million long-term unemployed back to work.

The biggest surprise in the report was the government’s pronouncement that Superstorm Sandy didn’t significantly affect the findings. (WSJ)

The change in total nonfarm payroll employment for September was revised from +148,000 to +132,000, and the change for October was revised from +171,000 to +138,000. Most of the downward revisions were in government employment.


Few people accept the BLS view that Sandy had little impact on the November data.

As it happens, the week the household survey was conducted was around the time Sandy made landfall. Oddly, by the Bureau’s own count, some 369,000 workers couldn’t make it to work, yet it insists the hurricane did not “substantively impact the national employment and unemployment” totals for last month. Go figure. (Barron’s A. Abelson)


The BLS’ own household numbers point to a meaningful impact from Sandy. In addition, the 20k drop in construction employment is highly suspicious in light of the clear improvement in construction spending in recent months (chart below from Lance Roberts and AAR).



Here’s what the National Federation of Small Businesses said recently:

Sandy will have a substantial impact on the jobs numbers. Although large
national firms will not experience much of an employment impact, thousands of small firms were shut down along the East Coast, and large numbers have not re-opened and their customers can’t shop. Segregating the responses in the “Sandy States” from the rest of the U.S. (including western Pennsylvania and New York which weren’t affected), it is clear that there was less hiring and more job loss in Sandy States. (NFIB via John Mauldin)

Meanwhile, up North where Sandy had no impact: Canada Nov. Employment Rises More-Than-Expected 59,300

Canadian employment rose almost six times faster than economists forecast in November, countering recent signs of slowing economic growth.

The increase of 59,300 lowered the unemployment rate to 7.2 percent from 7.4 percent, the first decline in five months, Statistics Canada said today in Ottawa.

Full-time employment rose by 55,200 in November and part- time positions increased 4,100, Statistics Canada said. Private companies added 48,200 workers and public-sector employment climbed 5,400.


LEI Says Slow Growth, Not Recession

For now, leading economic indicators are not pointing toward recession—but they continue to suggest “stall-speed” growth. The Conference Board’s Composite of Leading Economic Indicators just hit a new high for the current expansion. As you can see in the chart and table below, the six-month rate of change in the LEI is consistent with nearly 2% gross domestic product (GDP) growth. Going off the fiscal cliff would almost certainly take the economy into a recession, but the present fundamental picture remains out of the contraction zone.

LEI Says Slow Growth, Not Recession

LEI Says Slow Growth, Not Recession

Smile Rail stats point up

Excluding coal and grain, U.S. carloads were up 2.2% M/M in November and 5.5% Y/Y, the biggest percentage increase in six months. (AAR)image image

Pointing up Also, the diffusion index of ISI’s company surveys made a new high last week.

But there is the cliff:

[image]As recently as September, about half of consumers were largely ignoring the issue, according to a regular survey by RBC Capital Markets. But in the most recent survey, completed last week, 71% of respondents said they were following the cliff debate, and more than half said the threat had hurt their confidence or led them to hold back on spending.

Will Churchill is already seeing the issue affect his business. Mr. Churchill, co-owner of Frank Kent Motor Co. in Fort Worth, Texas, saw strong sales growth at his Cadillac and Honda dealership until early November.

But sales started to slow after Election Day, with many customers attributing their caution to the Washington budget debate. “Fifty percent of the customers we talk to, it comes up at some point,” he said. “They’re in the market, they want to buy, but the hesitation is that they don’t know what’s going to be the result in Washington.” (WSJ)

In the twilight zone:

Boehner Says Week Wasted in Talks to Avert Fiscal Changes

An agreement won’t be possible “if the president insists on his position, insists on my way or the highway,” he said. “That’s not the way to get an agreement.”

High five Boehner said that Friday but before Nancy Pelosi met with President Obama and came out with:

“It’s not about the rate—it’s about the money,” Mrs. Pelosi told reporters. She said the point was not “about being punitive to the high end—it’s about getting money to reduce the deficit, to grow the economy.”

To me, this sounds like progress: “It’s not about the rate—it’s about the money,”

Who will blink first?

Pointing up  In the end, the President of the U.S.A. is Barrack Obama. He is the ultimate person responsible for what happens. No president would knowingly do anything that would clearly and effectively result in a recession which, after all, would make things even worse for the United States and the world.

Obama will blink.


Pay attention to this Ned Davis Research chart via Liz Ann Sonders (Charles Schwab & Co.):

Investors' Extreme Pessimism Starting to Reverse

Investors' Extreme Pessimism Starting to Reverse

And to this basic technical reading which suggests that equities have decent support around the still rising 200-Day MA (1390) and resistance on the 50-Day MA (1420).

Stocks Move Back Above Trendlines



Earnings Growth Rate Cut By Nearly 2/3 since September 30 (Factset)

The estimated earnings growth rate for Q4 2012 is 3.5% this week, slightly below last week’s estimate of 3.8%. Estimate cuts to companies in the Financials sector were mainly responsible for the decrease in the growth rate this past week. Overall, the growth rate for the Financials sector decreased to 20.0% from 20.9% during the week.

Since the start of the quarter (September 30), the estimated earnings growth for the index has dropped to 3.5% from 9.3%. Seven of the ten sectors have witnessed a decline in expected earnings growth over this time frame, led by the Materials, Information Technology, Financials, and Industrials sectors.

The estimated earnings growth rate for the Materials sector is 6.4% today, down from an expectation of 24.0% at the start of the quarter. The projected earnings growth for the Information Technology sector is -2.4%, down from an expectation of 8.7% at the beginning of the quarter. The predicted earnings growth rate for the Financials sector is 20.0%, below an expectation of 27.8% at the start of the quarter. The expected earnings growth rate for the Industrials sector is -4.2%, down from a projection of 3.3% on September 30.

Guidance: High Percentage of Information Technology Companies Guide Lower

The reduction in expected earnings growth for Q4 2012 can attributed in part to a high percentage of companies issuing negative EPS guidance for the quarter, particularly in the Information Technology sector.

Of the 108 companies that have issued EPS guidance for the fourth quarter, 79 have issued projections below the mean EPS estimate and 29 have issued projections above the mean EPS estimate. Thus, 73% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the five-year average of 61%, but below the percentage at this same point in time in Q2 2012 (80%).

An unusually high percentage of companies in the Information Technology sector have issued negative guidance. Of the 32 Information Technology sector companies that have issued EPS guidance, 29 (or 91%) have issued EPS projections below analyst estimates. This percentage is well above the five-year average of 56%.

I did the calculation for you. Excluding IT, 76 companies have issued Q4 guidance and 50 (66%) were below the mean estimate.

Slow demand is hurting revenue but operating margins are necessarily impacted by lower capacity utilization (charts from AAR):


Pointing up The current decline in capacity utilization is similar to the early 2008 experience. Then we had the Lehman failure and all hell broke loose. Nothing similar is expected in 2013, barring the fiscal cliff, but capacity utilization needs to stabilize if current margin expectations are realized:


Smile  China’s recovery gains momentum 

The monthly flood of Chinese data:

  • [image]Industrial output rose 10.1% Y/Y in November, up from 9.6% in October and the strongest since March. On a MoM basis, VAI rose 0.86%, up from 0.82% in October and the fastest pace since May. 
  • Electricity production accelerated to 7.9% growth from 6.4%. That was the fastest pace for 2012.
  • Retail sales rose 1.5% M/M vs. 1.4% in October. Retail sales growth rose to 14.9% Y/Y from 14.5% in October. Real retail sales rose 13.6% Y/Y, up from 13.5% in October and the fastest pace of the year.
  • Investment in fixed assets grew 20.7% Y/Y, down from 22.2% in each of the prior two months. FAI rose 1.3% M/M vs. 1.9% in October. FAI by state-owned firms rose 17.1% Y/Y last month, while FAI by private firms rose 22.7%.
  • Real estate investment showed a marked rebound, registering 16.7% in the first 11 months, compared with 15.4 percent for the first 10 months.
  • China’s exports rose just 2.9% Y/Y in November, much lower than October’s 11.6% rise. Imports were flat against a 2.4% increase in October. Exports to the EU fell 18% Y/Y in November. For the first 11 months of the year, China’s exports to the EU were down 7%. China’s exports to the U.S. fell 2.5% Y/Y after rising between January and November.
  • China property November 2012, floor space sold, new starts - UBSNew floor area under construction in the real-estate sector showed signs of recovery, as residential sales rose 31.6% year-to-year,up from 25% in October and from -3.3% in November 2011. In the nine months through June, sales were down Y/Y each month, while since then sales have been up Y/Y in four of five months. Residential investment rose 21.8% Y/Y in November, up from 13.2% in October and 10% in September.
  • New home starts jumped 6.3% Y/Y last month, following declines of -9.4% in October and -28.1% in September. 
  • Land purchases by developers rose 16.8% last month, after -36.6% in October.
  • The Consumer Price Index rose to 2% Y/Y in November. CPI rose 0.1% M/M with food prices up 0.4% and non-food prices flat.
  • China’s PPI dropped 2.2% in November, the ninth straight month of decline.

Auto  November vehicle sales hit top gear  Passenger-vehicle sales in China hit a record in Nov as a series of positive indicators boosted the market.

A total of 1.419 million cars, sports utility vehicles, multi-purpose vehicles and minivans were sold in November, a 13 percent year-on-year increase, according to data from the China Passenger Car Association on Friday.

The number showed that total sales for the first 11 months jumped 6.6 percent year-on-year to 13.12 million, paving the way for an increase of at least 5 percent in passenger-vehicle sales this year.

Cui Dongshu, deputy secretary-general of the association, said the Guangzhou Auto Show last month helped passenger-vehicle sales surge more than 20 percent in the last week of November.

“More impressively, China’s homegrown brands recovered in the domestic market as their share of the passenger-car sector reached 35.1 percent, the highest in 20 years,” Rao said.



Chinese Survey Shows Higher Jobless Rate

A new survey shows that the real unemployment rate in China is double the official level, and layoffs rose sharply among migrant workers in the past year, underlining the challenge for China’s new leaders to maintain growth.

The survey of 8,000 households shows the urban unemployment rate hit 8.05% in June, up slightly from 8% in August 2011 and nearly twice as high as the official 4.1% rate.

The unemployment rate for China’s army of 160 million migrant workers has risen sharply to 6% in June 2012, up from 3.4% in August 2011 according to the survey, suggesting 10 million unemployed as a result of the sharp slowdown in exports and real-estate construction.

China’s official unemployment rate is based on urban residents registering for unemployment benefits. That measure leaves out key sections of the workforce—notably migrant workers, who go uncounted because they can’t register for such benefits in the cities where they go to work. For the last 15 years it has stayed in a tight range between 3.1% and 4.3%, failing to capture wrenching changes in China’s labor markets.

Mr. Gan’s survey attempts to overcome the problems of the official data by dispatching student researchers into households up and down the country.

OECD Composite Leading Indicators, December 2012

The CLIS for Canada, Japan, Russia, Germany, France and the Euro Area as a whole continue to point to weak growth. In Brazil tentative signs have emerged that the positive growth momentum predicted in recent months is dissipating.

In China and Italy, on the other hand, signs of turning points in the cycle are beginning to emerge. Tentative signs of a stabilisation in growth have also emerged in India.

In the United States and the United Kingdom, where consumer confidence picked up strongly last month, the CLI continues to point to economic growth firming.



Lightning  Japan sinks into fresh recession Revised GDP indicates contraction in six months to September

Japan quarterly qoq annualised seasonally-adjusted GDP - Soc Gen Revised quarterly gross domestic product data on Monday showed that output fell 0.9 per cent in the three months to September, in line with earlier estimates. However, the government also marked down its previous estimate of 0.1 per cent growth in the second quarter to a shade below zero, with growth in net exports cut almost in half. That meant that the six-month period met the textbook definition of a technical recession.

Storm cloud  Turkish growth below expectations
Exports perform less well than hoped

Gross domestic product grew 1.6 per cent in the third quarter compared with the same period last year, significantly below analysts’ consensus forecast of about 2.6 per cent.

GDP advanced 2.6 per cent the first nine months of the year on the same period in 2011. The government forecast for the year as a whole is 3.2 per cent, but some economists say such projections will now be revised downwards.

Storm cloud  Mexico warns of economic headwinds New government says finances in US and Europe will hit growth

Mexico’s new centrist administration says weakness in Europe and concerns about US finance will limit economic growth next year to 3.5 per cent. The figure is in line with previous official forecasts, but below that of most independent economists who had expect 4 per cent growth.

ECB – symbolism matters  Central bank should have cut its benchmark interest rate this week

(…) the ECB also appears to be signalling that a cut is more likely than not, and probably soon. But why wait, especially since it is the symbolism as much as the fact of the cut that really matters?

Lightning  Italian bond yields jump sharply higher
Monti’s decision to step down early leads to wave of uncertainty


Italy’s Bersani Vows Steady Hand

Pier Luigi Bersani, the center-left politician tipped in polls as Italy’s next leader, pledged to uphold his country’s economic commitments to Europe and not dismantle the current government’s overhauls, if he is elected.

Pointing up  Spain Bailout Caution Grows as Business Lobby Backs Rajoy

Spain’s biggest business lobby is getting as cautious as Mariano Rajoy’s government on a possible bailout request because of concern how stringent conditions might be to trigger European Central Bank bond-buying.

A rescue “could impose a criminal pace of reduction in public spending,” Alberto Nadal, vice secretary-general of CEOE, Spain’s main business group, said in an interview.

The group’s newfound skepticism contrasts with their earlier support for a request following the ECB’s unveiling of its bond-buying program in September after President Mario Draghi committed to do “what it takes” to save the euro. Rajoy has refrained from seeking such aid and pressure on him to do so has eased, with the yield on Spain’s 10-year bonds now 214 basis points lower than in July.

Encouraged by the impact of the ECB’s announcement on borrowing costs, business leaders share Rajoy’s optimism that the five-year slump is reaching a low and that measures to overhaul the economy will pave the way to a recovery next year, with already resilient exports and declining labor costs helping resorb Spain’s current account deficit.

…until yields rise again


Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows. Typically the
imagedynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs.

Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced
consumption. Those approaching their seventh decade need fewer cars and new homes. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years. (Bill Gross, Pimco)

The Collapse Of Microsoft’s Monopoly

(…) This chart comes from Goldman Sachs, and it shows Microsoft losing its market dominance of computing devices as smartphones and tablets have come into the market. (…)

Microsoft’s inability to make a smartphone people really love could be a deadly mistake. As people became comfortable with the iPhone, they became open to the idea of the iPad. As the iPad takes off, it is slowing PC sales. As people become comfortable with the iPad, they’re going to be more inclined to buy a Mac to stay in Apple’s ecosystem.


Here’s my humble contribution: two shots taken at the Aventura Mall in Florida within 5 minutes. Guess which is which.

image image


To Quote Thomas Jefferson, ‘I Never Actually Said That’

(…) Mr. Langworth says Chris Matthews, a fellow Churchill Centre board member and host of MSNBC’s “Hardball,” has misquoted Churchill. Last year Mr. Matthews made a promotional ad for MSNBC in which he recounted Churchill being told during World War II that he should cut government funding for the arts.

“Then what are we fighting for?” Churchill replied, according to Mr. Matthews.

Mr. Langworth says Churchill never said it, though many over the years have used what Mr. Langworth calls “this famous ‘red herring’ nonquote.”

Mr. Matthews, a self-described “Churchill nut,” insists he hasn’t misquoted his hero, but adds, “How can you prove someone never said something?” Confused smile


NEW$ & VIEW$ (9 NOVEMBER 2012)

Rainbow  China data herald end of slowdown
Industrial production, investment and retail sales accelerate

Industrial output growth rose to 9.6 per cent year on year in October from 9.2 per cent in September, while retail sales increased to 14.5 per cent year-on-year growth from 14.2 per cent.

Fixed-asset investment also picked up, as did newly started projects, an important predictor of future spending.

Spending on central government-invested projects rose 5.1 percent in the 10-month period from a year earlier, more than double the January-September pace, the data show.

Pointing up Growth in power generation, which had been lagging behind, finally caught up in October, rising 6.4% YoY after a 1.5% rise in September, as heavy-industry output accelerated.  Average daily production of steel (+11.7% vs. 4.9% in September), non-ferrous metals (+14% vs. 7.1%) and cement (+11.5% vs. 12%) were all strong.(CLSA)

China’s inflation rises 1.7% in Oct

On a month-on-month basis, October’s CPI fell 0.1 percent from the previous month, according to a statement posted on the NBS’s website.

Food prices, which account for nearly one-third of the weighting in the calculation of China’s CPI, rose 1.8 percent last month from one year earlier, which was down from the 2.5-percent increase in September.




China’s Oct PPI drops 2.8%  China’s PPI, which measures inflation at the wholesale level, dropped 2.8 percent year-on-year in October, compared with a 3.6-percent decline in September. On a month-on-month basis, the PPI moved up 0.2 percent in October, according to the NBS.



Smile  China’s Auto Sales Rebound in October

Sales in the world’s biggest auto market rose 6.4 percent to 1.3 million vehicles, according to the government-sanctioned China Association of Automobile Manufacturers. That was a recovery from September’s 0.3 percent contraction — the first monthly decline this year. (…)

Sales growth declined from June’s 15.8 percent to 11 percent in July and 3.7 percent in August.

In October, total vehicle sales rose 5.3 percent to 1.6 million units, according to the CAAM.


Pressure Mounts on Fiscal Crisis

The White House and GOP lawmakers faced pressure to reach a solution to the looming budget crisis after new warnings from the CBO.

If We Step Away From the EdgeThe CBO on Thursday detailed its view that if Washington policy makers don’t act before the end of the year, the economy would contract by 0.5% in 2013. The unemployment rate would jump from 7.9% to 9.1% by the end of 2013, according to the CBO—a nonpartisan arm of Congress.

If all the spending cuts and tax increases are avoided, CBO forecast the U.S. economy would grow by about 1.7% next year.

In a 14-page analysis, CBO economists offered Congress an itemized list of choices and consequences. Waiving cuts in domestic and defense spending would, for instance, add three-quarters of a percentage point to economic growth by the end of 2013. Extending all Bush-era tax cuts—but excluding the payroll tax holiday—would add about 1.5 percentage points. (…)

CBO also projected that avoiding the fiscal cliff would take the federal debt from last year’s 73% of gross domestic product to 86% in 2020. (…) Before the 2007-09 recession, the debt-to-GDP ratio was below 65%.


Eurozone economic data have lately been somewhat better, even slightly encouraging, but that seems to be changing for the worst. Markit writes:

Having enjoyed surprising buoyancy in the summer, exports from both countries are now waning, corresponding with signals from the business surveys that the region’s core nations are suffering not just in the face of dwindling demand from their euro neighbours, but also from softening demand further afield, notably Asia and to a lesser extent the US.

Exports from Germany fell 2.5% in September, according to the Federal Statistics Office, the biggest monthly fall since last December. The decline pushed the less volatile three-month-on-three-month comparison down, registering a 1.5% increase in September; the weakest increase since February.

Both the PMI and IFO surveys suggest the weakening in Germany’s foreign trade is not a one-off. Export indices from both surveys are running at levels broadly consistent with a 5% rate of decline in exports (three-months-on-three-months), suggesting the official data have some way to fall before coming into line with the recent downbeat tone of the surveys.

image image

It was not just the export data which provided an indication of a slowing German economy – imports fell 1.6%, pointing to a slowing domestic economy. The disappointing trade data also follow recent news that both German manufacturing output and orders fell 2.3% and 3.3% respectively in September.

imageA slowing of French trade was also signalled in September, with official data registering a 1.5% decline in exports in September, alongside a 1.9% drop in imports.

The rate of growth for exports meanwhile picked up to  2.1% in the three months to September, but the improvement largely reflected what looks like temporary strength in August. As with Germany, the survey data suggest that the underlying trend in exports is firmly negative, suggesting the official data looks set to disappoint again in October.

French Recession Looms as Industrial Production Slumps

Production fell 2.7 percent in September from August, Paris-based statistics office Insee said today.

In Italy, industrial output declined the most in five months in September, signaling the country remained mired in recession in the third quarter. Output fell 1.5 percent from August, when it rose 1.7 percent, national statistics office Istat said in Rome today.

Reuters Exclusive: Worried Germany seeks study on French economy – sources

(…) Two officials, speaking on condition of anonymity, told Reuters this week that Schaeuble asked the council of economic advisers to the German government, known as the “wise men”, to consider drafting a report on what France should do.

Schaeuble’s request denotes growing concern in Berlin and among private economists over the health of the euro zone’s second largest economy, which is set to miss a European Union goal for reducing its public deficit next year.

Maersk Forecasts Slowing Europe Trade

A.P. Moller-Maersk said global demand for seaborne containers will grow 3% this year, down from its earlier projections, because of declining trade to Europe, and reported a sharp rise in third-quarter net profit

In its previous forecast, given in August, Maersk said it expected global demand for seaborne containers to increase 4% in 2012. The global market for shipping grew 7% in last year, according to Drewry Shipping Consultants Ltd., as quoted in Maersk’s 2011 annual report.

Eurozone faces brinkmanship on Greece
Athens pushed close to default on €5bn debt payment

(…) according to officials involved in negotiations, international lenders remain far apart on how much debt relief for Greece is needed and who will bear the losses from lower debt repayments.

“It is absolutely clear that we will need another round after next Monday,” said one senior eurozone official involved in the talks. “There are a number of issues that still need to be wrapped up.”

Although negotiators insisted they are narrowing the differences, time may be running out. One senior official said the European Central Bank, which holds the €5bn in debt due next Friday, is resisting rolling the payment over, putting pressure on all sides to reach a deal quickly. (…)

Call me  Mario Draghi, the ECB president, said on Thursday he had agreed to allow the profits to be passed back to Greece, but added he was unwilling to take further measures to help lower Athens’ debt burden, putting additional pressure on eurozone governments to take the hit.

The ECB is by and large done,” Mr Draghi said.


The U.S. employments data just keep being revised upward. During the last 4 months, the monthly gains averaged 173k. A few charts to consider:

  • Private employment has improved.


  • Weekly hours worked have plateaued at a high level. Companies will need to add employees if demand improves.


  • Construction employment, the big lagger, is no longer declining. It even surged last month…


  • …in spite of further declines in residential construction employment.Confused smile


  • Surprisingly, non-resid. construction employment rose in the last 2 months after 6 weak monthly showings.


  • But why is resid. construction employment flat in the face of rising housing starts? Maybe because many construction workers have “unofficial status” which would explain the lags in every turns. Housing-related employment should turn up shortly. These are well paid jobs.



Following up on my Oct. 18 Facts & Trends: The U.S. Energy Game Changer. The oil market is undergoing a major change with potentially huge consequences for the world.

OPEC Sees Demand for Its Crude Falling to 2016 on Economy, Shale

Global need for fuel from the Organization of Petroleum Exporting Countries will shrink to 29.7 million barrels a day in 2016, 1.4 million less than this year, the group said today in its annual World Oil Outlook. The estimate for 2015 is 1.6 million barrels lower than that forecast in last year’s report. OPEC predicts it may have more than 5 million barrels of daily spare production capacity as early as next year. (…)

“Shale oil represents a large change to the supply picture.” (…)

OPEC reduced estimates for global consumption in 2016 by 1 million barrels to 92.9 million a day, meaning demand will advance by 5.1 million, or 4.7 percent, from last year. Seventy percent of the increase will come from emerging nations in Asia, while fuel use in developed nations, which peaked in 2005, will decline by 0.9 percent to 45.7 million a day from this year to 2016, according to the report.

Supplies from outside OPEC will increase in excess of 4 million barrels a day from 2011 to 2016, reaching 56.6 million. The gain will be driven by output of U.S. shale oil, Canadian oil sands, and crude from the Caspian Sea and Brazil. The assessment for non-OPEC supply to 2015 is 2 million barrels a day more than in last year’s report.

American Oil Boom Shrinks Trade Deficit  America’s oil boom is pumping up exports and driving down the trade deficit.

The U.S. spent $32.8 billion on oil imports in September and sold $11.2 billion in oil — virtually all of it in the form of gasoline, diesel and other so-called petroleum products — to customers in other countries, for a trade deficit of $21.7 billion. A year ago, that deficit stood at $26.3 billion. Adjusting for inflation, the deficit has shrunk by nearly 40% over the past five years.

What’s going on? Lower demand is part of the story. U.S. oil consumption rose steadily in the 1990s and early 2000s, hitting 20.8 million barrels per days in 2005. But demand leveled off in the mid-2000s due to improved fuel efficiency, changed driving habits and increased consumption of ethanol, then plunged at the end of the decade due to the recession. Consumption bottomed out at 18.8 million barrels per day in 2009, and has hardly rebounded from there.

The major driver, however, is supply. U.S. oil production has risen more than 20% over the past five years, reversing two decades of decline. Drilling techniques that first revolutionized the natural-gas industry have now unlocked vast new oil fields in North Dakota, Texas and perhaps even Ohio. North Dakota’s oil production has more than doubled in just the past two years.

The U.S. still imports far more oil than it exports, a fact that isn’t likely to change any time soon. But the gap is getting narrower: The U.S. now imports about 40% of its oil, down from 60% just a few years ago. That’s shaving billions off the trade deficit and giving a boost to the economy — Thursday’s trade report led Barclays to boost its estimate of third-quarter economic growth by four tenths of a point to 2.8%.

Smile  U.S. Trade Deficit Narrows in September as Exports Rebound

The September improvement came in a rebound in exports to $187.0B, up 3.1% from August and 3.5% from a year ago. Imports also increased, by 1.5%, to $228.5B, also up 1.5% from a year ago. In chained 2005 dollars, the deficit in goods improved to $46.8B from $48.2B in August. Real exports were up 3.1% (+4.3% y/y) after falling 2.6% in August, while real imports increased 1.2% (+3.1% y/y), reversing a 1.1% decline the previous month.

The rebound in real exports came in food, feeds and beverages, up 7.9%, industrial materials and supplies, up 6.1%, and non auto consumer goods, up 3.1%, all reversing August drops of similar magnitude. Capital goods and “other” goods grew modestly, while auto vehicles, parts and engines declined for a third consecutive month.

High five  However, Moody’s warns that

the recent drop by the global composite PMI portends a further slowing by the year-to-year growth rate for US business sales excluding sales of identifiable energy products from the prospective 3.4% of Q3-2012 to approximately 1.0%. During 2003-2007, this version of core business sales grew by 5.3% annualized, on average.


The global slowdown has already pared the year-over-year growth of US exports from Q3-2011’s unsustainably rapid 15.4% to the 2.6% of Q3-2012. A drop by the moving-five-month average of the ISM-derived composite index of US export orders to the contractive 48.2 of October 2012 warns of an impending yearly contraction by US exports. Export orders’ moving five month average underwent similar dives in 2008, 2001, and 1998 and, in each incident, exports would contract year-to-year quickly enough.



October’s global composite PMI also warns of at least a 100 bp swelling by the recent US high-yield bond spread of 558 bp. By comparison, when the global composite PMI averaged 56.8 during 2003-2007, the median US high yield bond spread of that span was a much thinner 371 bp. (Figure 3.)



The latest S&P tally (Nov. 6) estimates Q3 earnings at $24.63 down 1.2% from the previous week. That would put EPS 2.6% below their Q311 level. Trailing 12 months EPS would thus be $98.03, down 0.7% from their level 3 months ago.

Q4 estimates are tumbling fast and are now $26.11, down 2.8% since September 28 but still up 10% YoY. Even though Q4 estimates are down 8% since March, they remain vulnerable to further downward revisions.

With 414 companies in, 63% beat estimates while 24% missed.

Financial companies have provided a large part of the surprise and the growth in Q3. This Moody’s table illustrates this:



In all, earnings are not collapsing, at least just yet. The recent decline in oil prices should bring inflation down in coming months, providing valuation support to equities which, by the way, are now sitting on their 200 day moving average.



California Voters Approve Higher Taxes

(…) In approving a ballot measure sought by Gov. Jerry Brown to raise taxes for several years, Californians took a step toward improving the state’s fiscal situation and avoiding education cuts.

According to the California Secretary of State’s website, 53.9% of voters backed the measure, Proposition 30, while 46.1% voted against it, with all votes counted except for provisional and some mailed-in ballots. (…)

Under the measure, Californians from calendar years 2013 through 2016 will see their sales-tax rate rise by a quarter of a percentage point. For individuals making more than $250,000 annually or couples making more than $500,000, the income-tax rate for the 2012 through 2018 calendar years also will rise, by one to three percentage points.

Proposition 30 is expected to generate an additional $6 billion a year for the state’s general fund through the fiscal year ending in June 2017, with a smaller sum in the 2018 and 2019 fiscal years. A state law generally requires education spending to grow along with revenue.

Hard line Republicans might take notice.

SNB warns on challenge of forex reserves

Fears that debt stockpile could destabilise markets

The Swiss National Bank warned that managing its ballooning foreign exchange reserves had become a “major challenge” and said it was in talks with other central banks about how to avoid distorting local markets with its hefty purchases of overseas government debt.

Switzerland has built up the fifth-largest stockpile of foreign currency reserves in the world as its central bank battled heavy inflows this year from overseas investors seeking a haven in the Swiss franc amid the market turmoil in the eurozone.

While pressure on the franc has lifted recently, the SNB has accumulated SFr424bn in overseas currencies on its balance sheet owing to its policy of keeping the Swiss franc weak to help its country’s exporters. Since September 2011, the central bank has promised to buy euros to keep its exchange rate against the franc at SFr1.20.

Iran Fired on U.S. Drone

Iranian fighter planes shot at an unarmed U.S. drone last week, in an unprecedented air attack that raises military tensions in the Persian Gulf.


NEW$ & VIEW$ (15 OCTOBER 2012)


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

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

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

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

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

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

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

  Factset adds:

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

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

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


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

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

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

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

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

Margin squeeze:

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

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

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

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

Buyers Are Back After Foreclosure

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

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

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

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

A housing boom will lift the US economy

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

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

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

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

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

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

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

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

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

Also: Canadian housing market peers over the edge


Charting the future of crude oil

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

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

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

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

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

I will be shortly posting on that very important trend.

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

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

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


Wholesale Prices Rise

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

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

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


Finance Chiefs at Odds

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

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

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



China’s Trade Surplus Widens

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

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

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

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

High five  Before getting too excited on China:

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

  • Alarm bells jingle over Xmas exports

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

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


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

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

  • World economies remain weak:

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




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


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

China Inflation Eases

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


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

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

India’s Inflation Accelerates to 10-Month High

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

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

Auto  Volvo Halts Production at Sweden Plant

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

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

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

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

Tata Motors Global Sales Fall

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

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

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

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

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

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

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

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


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

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

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

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

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

Goat Schumer to Tax Reform: Drop Dead

A Senate Democratic leader lays down a partisan 2013 marker.

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


NEW$ & VIEW$ (10 SEPTEMBER 2012)

Trends in the U.S. job market remain below what’s needed to keep the economy alive and well.


imageJobs Data Weigh on Obama, Fed

America’s employers added jobs at a tepid pace in August, posing a re-election challenge for Obama and raising the likelihood the Federal Reserve will step in to spur growth when it meets in the coming week.

June dropped from the original estimate of 64,000 to just 45,000 while July’s monster 163,000 expectation blasting number was slashed to 141,000. 

The Labor Department report showed private employers ranging from utilities to health care added a total of 103,000 jobs in August, while government cut head counts by 7,000. States and localities shed 10,000 jobs while the federal government added 3,000. (Charts beloe from Markit)


image image

(…)  the labor market remains fragile as evidenced by the weak non farm payrolls (only 96K jobs added in August, with downward revisions of 41K to the prior two months) and a second successive employment decline in the household survey (-314K in the last 2 months). True, the unemployment rate fell to a four-month low of 8.1%. But that’s entirely due to people giving up the job search as reflected by the drop in the participation rate to 63.5%, the lowest since 1981.

The small gains in full-time jobs in August did little to significantly alter a trend that’s been apparent since Q2, with a move away from full-time and towards part-time jobs. That has contributed to limit growth in hours worked to less than 0.5% annualized over the Q2-Q3 period. We haven’t seen such weakness since 2009.


As today’s Hot Charts show, barring a spectacular increase in productivity, that should translate into weak GDP growth in Q3 as well.
Given Chairman Bernanke’s emphasis on labor markets, this general weakness in employment suggests the Fed will downgrade its forecasts at the FOMC’s September meeting. That’s not to say that QE3 will be dispatched this month, but it’s clear that the probability of QE action sooner rather than later, has increased significantly. (NBF)

This next chart from IBD:

Weak Job Growth, Labor Force Exodus Signal Major Woes

Alan Abelson:

(…) there are now some seven million poor souls, or 2.9% of the population, who are not in the labor pool but want a job, a new high for the current cycle. Last month’s work week was flat, and so were average hourly earnings. The yearly gain in hourly earnings of 1.7%, they sigh, is less than half the rate of early 2009.


(…) more non-working people being “supported” (for lack of a better term) by the people who are working.

image image


Uncertain times, uncertain employers, uncertain jobs, uncertain income, weak spending, weak economy:


Pointing up   CreditSights via FT Alphaville:

MODERN DAY DEPRESSION:  Mortimer Zuckerman: Those Jobless Numbers Are Even Worse Than They Look

(…) We are experiencing, in effect, a modern-day depression. Consider two indicators: First, food stamps: More than 45 million Americans are in the program! An almost incredible record. It’s 15% of the population compared with the 7.9% participation from 1970-2000. Food-stamp enrollment has been rising at a rate of 400,000 per month over the past four years.

Second, Social Security disability—another record. More than 11 million Americans are collecting federal disability checks. Half of these beneficiaries have signed on since President Obama took office more than three years ago. (…) (Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.)

Surprised smile  So, 56 million Americans on food stamps/SSD, 18% of the population of the “richest country in the world”. David Rosenberg adds:

(…) bear in mind that in the month of August, more people went on the food-stamp program (173,000) than those who managed to find a new job (96,000).







The chart above is very troubling. Corporate America’s profits and profit margins are at all-time highs even with its huge pile of unproductive cash. Yet, it’s not hiring nor investing.




Is it the uncertainties about world finances and/or U.S. politics? The stigma of the Lehman crisis? Market diktat or, as Karl Marx saw it, pure selfishness on the part of the corporate elite (“la bourgeoisie”). Perhaps all of the above.

The reality is that the governmental sector is in no position to spend much more while the American consumer is squeezed out by weak employment, low wage growth and rising food and energy prices.

The pendulum will eventually, as always, swing back.



Somebody should revisit Henry Ford’s business approach.


Friday, I posted about the weakening Cass Freight Index which showed that total freight expenditures have now fallen four consecutive months.

AAR reports that seasonally adjusted rail traffic declined again MoM in August



Excluding the volatile and less economy-sensitive coal and grain segments, carloads have been weak for most of 2012.



Another telling chart from the AAR report:



And that one which needs to be considered along with the recent employment stats:


Meanwhile, across the pond:

Merkel Backs ECB, Bucking Critics

Germany’s government threw its support behind the ECB’s plan to intervene in bond markets, countering a deluge of domestic criticism.

imageThe ECB is acting “independently and within the framework of its mandate,” a spokesman for German Chancellor Angela Merkel told reporters Friday, adding that the ECB’s offer to buy bonds of struggling euro-zone governments is aimed at ensuring “the stability of money.”

German Finance Minister Wolfgang Schäuble also backed the ECB’s move, contradicting the Bundesbank’s statement on Thursday that ECB bond-buying is “tantamount to financing governments by printing bank notes.”

ECB officials “know very well what they have to do,” Mr. Schäuble told reporters in Stockholm. “It’s not the beginning of monetary financing of sovereign debt.”

Super Mario reaches the last level – German politics

Cummings illustration(…) Mr Draghi, 65, urbane and in an immaculately tailored dark suit, had reasonable arguments about why so-called “outright monetary transactions”, or OMT, are well within the remit of the bank and why strict conditions are required.

But for an illustration of just how pragmatic that makes the US-trained economist, one-time Goldman Sachs banker and long-time technocrat, rewind to his first press conference after taking over from Jean-Claude Trichet in November 2011.

“What makes you think that the ECB becoming the lender of last resort for governments is what is needed to keep the euro area together?” he said then. “No, I do not think that this is really within the remit of the ECB.” Eight months later, in July, he pledged to “do whatever it takes” to save the euro. (…)

But if the talk of big sticks to accompany the carrot of unlimited bond-buying was meant to convince Germans that the Italian in control of their printing presses had their backs, it is unclear he has succeeded.

Steaming mad  Die Welt spoke of a “gigantic danger” and the “death” of the Bundesbank. The Frankfurter Allgemeine, paper of record for German conservatism, judged the ECB to have become a “prisoner of politics”. The mass-market Bild Zeitung said Mr Draghi had written a “blank cheque for debtor states”.


  • Dutch elections

Officials are nervously watching Thursday’s Dutch national elections where, until recently, strong polling by two eurosceptic parties – the far-left Socialists and far-right Freedom Party – was forcing Mark Rutte, the sitting Liberal prime minister, to turn increasingly anti-bailout on the campaign trail.

Mr Rutte has promised Dutch bailout loans to Greece will not be restructured, something being actively contemplated by eurozone leaders, and has vowed no new bailouts for Athens despite widespread recognition such additional aid is likely.

As one of the few remaining triple-A rated eurozone countries, the Netherlands retains outsized influence in crisis discussions, and a strong showing by anti-bailout parties could prevent a new government from agreeing more help for struggling southerners, particularly Greece.

  • Germany and the ESM

On the same day, Germany’s constitutional court is scheduled to rule on whether the eurozone’s new permanent €500bn rescue system, the European Stability Mechanism, violates the country’s basic law.

More than 37,000 German citizens have signed onto the challenge on the grounds it exposes German taxpayers to funding the ESM without proper democratic control over how those funds are used.

A ruling to stop – at least temporarily – the ESM would throw rescue efforts into disarray since the existing, temporary €440bn fund is running low on cash and is due to expire in less than a year.

The broad consensus among legal experts is the court will stop short of a drastic decision forcing a halt to the fund, but judges are expected to attach strict conditions to any further German financial aid.

  • Spanish banks

Madrid is expected to unveil a highly-anticipated “bottom-up review” of its banking sector as early as next week. Spanish officials are selling the review as the defining act in persuading markets that no more nasty surprises lurk within the country’s financial system.

Luis de Guindos, the Spanish finance minister, has indicated the review will show banks only need an additional €60bn of the €100bn offered in aid from the eurozone bailout fund, a sign the review has not uncovered any unwelcome surprises.

But private estimates are as much as double that figure, and some weaker banks are showing signs of deteriorating faster than expected. Bankia, which requested €19bn in state aid in May but has yet to receive it, was given an emergency €4.5bn bridging loan from Spain’s state bank rescue fund this week following large losses in the first half.





Lightning  [image]France Outlines Austerity Goals

Mr. Hollande said his government would propose a budget this month packed with as much as €20 billion ($25.6 billion) in new taxes and €10 billion in spending cuts. He confirmed that the budget will include a special 75% tax for people earning more than €1 million a year that has fanned fears of an exodus of France’s wealthiest citizens.

Lightning  Portugal Adds Austerity Measures

Prime Minister Pedro Passos Coelho said he would cut public employees’ salaries, requires that all workers to pay more for social security, and raise taxes on the rich—the latest belt-tightening steps aimed at meeting Portugal’s obligations under an international bailout program. (…)

Employees will be required to pay 18% of their salaries to social security, up from 11%, allowing companies to cut their contributions from 23.75% to 18%. “We will reduce substantially the costs of labor, providing incentives to investment and job creation,” the Portuguese leader said.

Public workers will lose one paycheck out of the 14 they receive each year.(…)

Evidence is growing that some austerity measures are weakening the country’s already-fragile economy. The government said this month it would be hard to meet its pledge to hold this year’s budget deficit at 4.5% of the gross domestic product. The steps outlined by Mr. Passos Coelho on Friday are aimed at holding down next year’s deficit while stimulating growth.(…)

High five  Finns loath to approve Greek bailout changes
Country says it has reached limits of how far it can go

The Finnish parliament would find it all but impossible to approve any changes to the latest Greek bailout, according to senior politicians in Helsinki.



Storm cloud  China Economy Shows Frailty

Imports fell 2.6% from a year earlier. Exports rose 2.7% in August from a year earlier, up from July’s 1.0% rise.

Much of the weakness came from crisis-hit Europe, China’s biggest trading partner, with exports to the EU falling 12.7 per cent in August from a year earlier.

Exports to Japan also disappointed, registering a decline of 6.7 per cent in August, while shipments to the US rebounded with 3 per cent growth, compared with an increase of just 0.6 per cent in July. (Chart below from Scott Barber)


  • Industrial production +8.9% YoY vs +9.2% in July.
  • Fixed asset investments +19.1% vs 20.4%. +20.2% first 8 months.
  • Electricity output +2.7% vs +2.1%.
  • Retail sales +13.2% vs 12.2% in July and +12.1% in June.
  • CPI +2.0% vs +1.8%. Food prices +3.4% vs +2.4%. Non-food +1.4% vs +1.5%. MoM CPI +0.6% vs +0.1%.
  • PPI -3.5%

Sales of residential floor space expanded 13.3% year-to-year in August, a sign that the government’s strict controls on sales—intended to control runaway prices—are starting to fray.

Stronger sales have prompted developers to break ground on new developments. New residential floor space under development expanded 4.9% year-to-year in August, the first month of growth since the end of 2011.


Hu: Proactive fiscal policy will continue  China will continue to pursue a proactive fiscal policy and a prudent monetary policy as the Chinese economy is facing “notable downward pressure“, President Hu Jintao said

Speaking of the challenges besetting China’s economy, Hu said lack of balance, coordination and sustainability still weigh on the country’s economic growth and notable downward pressure remains, especially for the Small and Medium Enterprises and exporters. (Hu expounds on China’s economic policies at APEC)


The math of the “stimulus package”: 1 trillion yuan over 3 years is about 0.5% of annual GDP. The 2008-09 package was 2.5-3.0% of GDP. Other announced “city packages” sound more like fantasy. More “Beijing announcements” are likely but actual spending is unlikely before 2013.

While the plethora of plans is stretched over several years – and lacks obvious sources of funding to cover a seven trillion yuan headline total – it is clear that the Politburo is sufficiently alarmed by mini-slump of recent months to put its reform drive on hold, opting instead for prime pumping to help the Communist Party through its handover of power later Autumn.

Cheng Li, research director at the Brookings Institution, said a key reason for the hard-landing is a “crisis of legitimacy” in the upper echelons of Chinese leadership, with fears growing that the transition could prove unruly as 70pc of top cadres and the military are replaced.

“You cannot forecast the Chinese economy unless you have a sophisticated view of the political landscape and the current succession crisis,” he said.

“This legitimacy crisis is worse than in 1989 [Tiananmen Square], and may be the worst in the history of the Communist Party. People are afraid that it could lead to revolution if it is not handled well.”

“That is what is causing capital flight. All the top officials are trying to get their money out of the country,” he said. (Ambrose Evans-Pritchard, UK Telegraph)

China’s Trade Goal in Doubt as Europe Weighs on Christmas Orders: Economy  Chinese toy merchant Pan Junping says this is usually among his busiest times as customers in the U.S. and Europe load up on orders for Christmas. This year, he’s quieter than ever.

The situation is possibly worse than 2009, and confidence is zero,” said Pan, 39, who’s frozen salaries and expects a 30 percent decline in annual sales for his trading company in Yiwu city, in eastern Zhejiang province. “It’s not busy at all.”

Vehicle sales increase, but dealers see profits drop  China’s passenger vehicle sales continued to recover in August, with the third-highest year-on-year growth in 20 months.



The headline above was from The China Daily, a Party newspaper. The chart shows little growth if any, however. Yahoo Finance wrote:

China’s auto sales growth tumbled to 3.7 percent in August, further deepening an economic slowdown, data showed Monday.

Customers bought 1.23 million cars, according to a government-authorized industry group, the China Association of Auto Manufacturers. The lower growth extended a steady decline from July’s 11 percent rate and June’s 15.8 percent.

Pointing up  Remember, these are not final sales, only sales from the manufacturers to the dealers.
China stimulus – wishful thinking
Bad debts from previous misspent stimulus will damp banks’ will to lend

The problem is one of financing. Few details were released. Asset quality is fast deteriorating among Chinese banks as bad debts emerge from the latest round of misspent stimulus. That will damp their will to lend. And local government finances are in tatters. Beijing estimates that their debts stand at Rmb11tn, or a quarter of China’s output. Moody’s thinks the debts could be Rmb3.5tn higher. Granted, China has Rmb19tn in foreign exchange reserves and a strong official fiscal position. But converting reserves into renminbi to spend at home will destabilise the exchange rate. And disguised indebtedness in local governments could put the debt-to-output ratio far north of its official 17 per cent.

Storm cloud  Japan GDP revision raises recession fears  Growth in second quarter halved from earlier estimate

Money  South Korea Boosts Stimulus by $5 Billion

The 5.9-trillion-won ($5.23 billion) package—4.6 trillion won of stimulus for the remainder of this year and 1.3 trillion won for next year—doesn’t require a new national budget, the ministry said. It expects the latest stimulus package to add 0.06 percentage point to this year’s economic growth and 0.1 percentage point to next year’s.

The stimulus announced Monday will cut taxes on individual incomes and purchases of homes or cars, as well as expand state-funded social welfare programs. It follows a 8.5 trillion won stimulus package announced in June to boost the economy in the second half of 2012.

The combined stimulus of 13.1 trillion won for this year equates to 1% of the country’s gross domestic product.

Saudi Arabia Concerned About Rising Crude Prices

“The current high price of oil is simply not supported by market fundamentals. The market is well balanced, forward cover remains within an acceptable range and inventories are more than adequate,” Mr. Naimi said in an emailed statement.

“Saudi Arabia will, as always, take all necessary steps to ensure the market is well supplied and to help moderate prices—and we will meet any additional demand from our customers.” (…)

Saudi Arabia produced about 9.7 million barrels a day of crude in August, down from 9.8 million barrels a day in July, slightly below its average production levels of 9.94 million barrels a day in the first half of 2012.

But the kingdom is likely to pump more crude than it supplies to the market in the fourth quarter, leading to further accumulation of stocks.

Oil Supplies Appear Tighter in Crisis Mirror  Investor perceptions of tight supply in the oil market, which have underpinned Brent crude’s 26% rally since late June, may be distorted.

OECD refined product stocks as a multiple of demand and exports hit the bottom of the five-year range in June. But when looked at for the more stable preceding five-year period, from 2003 to 2007, this year’s figures look more in line.

Commodity investing for the long term!



US companies gloomy about earnings growth Pessimism at its worst since 2008 as global slowdown hits demand

imageDuring the latest reporting season S&P 500 groups were three times more likely to say they would miss analysts’ expectations of third-quarter earnings than beat them. That was the worst guidance ratio since the final quarter of 2008, immediately after the collapse of Lehman Brothers.

“Historically, we have only seen numbers like this during times of recession,” said Christine Short, who tracks earnings at S&P Capital IQ. “It tells you something about how American executives see the world.”  (…)

Nearly 400 companies did not offer any guidance at all, suggesting uncertainty about future growth prospects, the most since the third quarter of 2009.

Intel Warns on Woes in PC Market

Intel Corp. said its revenue in the third quarter will likely be more than $1 billion less than it expected, as a series of woes multiply for personal computer makers that buy its chips. (…) The midpoint of the new range indicates a decline of about 2% over the second quarter, a period its revenues typically grow. (…)

At the same time, Intel cited slowing demand in emerging economies—a key source of sales growth in recent years—and softening sales of PCs to enterprises. While a warning from Intel was widely expected given downbeat results last month from customers Dell Inc. and Hewlett-Packard Co., some analysts said they were surprised by the magnitude of the revenue shortfall.


NEW$ & VIEW$ (9 August 2012)

RECESSION WATCH: Make sure you read through the end.


Storm cloud  Recent macro data from China point to further slowdown while easing inflation is fueling hopes of more intervention from Beijing.


  • Beijing Reports Slowing Inflation [image]China’s consumer inflation eased further to 1.8% in July, leaving some room for the central bank to continue loosening monetary policy to support growth.

The consumer price index in July was up 1.8% from a year earlier, decelerating from June’s 2.2% pace. China’s producer price index, an indicator of upstream inflation faced by manufacturers, was down 2.9% in July from a year earlier, after a 2.1% drop in June.

Keep in mind that food prices (31% of the Index) will soon begin their seasonal uptick. CPI-food rose 2.4% YoY in July, down from 3.8% in June and 6.4% in May. Non-food CPI was +1.5% in July, up from +1.4% in both June and May. Non-food prices rose 0.2% MoM in July after being unchanged the previous two months

Pointing up  Industrial production data showed the July year-on-year rise was 9.2 per cent, which was a decrease from the June year-on-year (9.5 per cent) figure. The graph below from Michael McDonough of Bloomberg Brief shows the monthly year-on-year rate of change, along with the quarterly GDP figures (via FT Alphaville):

China quarterly yoy GDP and  monthly industrial production - Bloomberg Brief


The tight correlation between IP and GDP suggests that risks of further slowing in China GDP remain high as the economic rebalancing is but an elusive goal to this day. More data from yesterday’s releases:

  • Electricity output rose 2.1% YoY in July. It was zero in June and +2.7% in May. Is this a new uptrend?
  • China’s passenger-car sales to dealerships in July rose 10.7 percent from a year earlier to 1.12 million units. In the first seven months, passenger-vehicle deliveries rose 7.5 percent to 8.74 million units, the association said. Intensifying competition in the Asian nation this year has led to a buildup in inventory and steeper price cuts among distributors. A measure of vehicle inventory rose to the highest level in four months in June, a level considered “cautionary” by global standards, the China Automobile Dealer Association said in an Aug. 1 statement.
  • Retail sales growth fell to 13.1% from 13.7%.
  • Fixed asset investment, which Beijing is intensely targeting rose 20.4% in July vs 21.2% in June and 19.9% in May. No acceleration there just yet.
  • China July Home Sales Decline as Wen Vows Curbs to Stay

China’s home sales transaction value dropped 14.5 percent in July from the previous month as the government vowed to maintain curbs on the property market.

The value of homes sold fell to 454.4 billion yuan ($71.5 billion) from 531.3 billion yuan in June, based on the difference between the National Bureau of Statistics’ data for the first seven months and first half of the year. Housing sales from January to July declined 1.1 percent to 2.4 trillion yuan from a year earlier, according to the data.

China’s Profitless Recovery Problem

While America struggles over a recovery with few jobs, China is set for a recovery with shrinking profits. In a raft of negative data for China’s economy in July, it’s falling growth in industrial output that will get most attention.

(…) That is one of the reasons Beijing’s attempt to stimulate growth has been slow to take hold. With more production capacity than they know what to do with, China’s businesses are in no rush to participate in another investment splurge. Long term loans to business, a proxy for investment appetite, fell 26.6% on-year in the first half.

China’s government is stepping into the breach. Investment funded from the state budget is up 30.5% on-year in the year to July. Growth in railway investment has turned positive for the first time since early 2011, and the National Development and Reform Commission has accelerated approval of major investment projects.

With public debt low and inflation falling, the government has enough firepower to keep growth close to 8% for the year. But excess capacity still means falling margins and profits for Chinese firms. Profits in the steel and cement sectors, where the problem is particularly severe, are down around 95% and 50% on-year in the first half. Profits for China’s industrial sector as a whole are down 2.2% on year.

Here’s one of the headwinds China is now facing:

Mexico Wages Undercut China, Fuel Manufacturing Boom

In 2005, China’s productivity-adjusted manufacturing wage advantage over Mexico was $1.22 an hour, but that narrowed to 34 cents in 2010, according to the Boston Consulting Group. They switched places this year, and Mexico’s wage advantage is estimated to widen to $1.75 by 2015.

Fast-rising Chinese labor costs are prompting companies to “reshore” production back to Mexico and the U.S., where transportation and other logistical costs are lower.


Sad smile  More Than 50% of Poll Respondents Expect Economy to Get Worse  Consumer spending in the U.S. continued to decline during July as consumer sentiment about the economy waned and expectations about personal finances were unchanged, according to Discover Financial Services’ U.S. Spending Monitor.

However the portion of consumers that expect the economy will get worse rose to more than half for the first time this year–up 4 percentage points at 53%–as sentiment among men worsened. The portion of men who indicated expectations the economy will worsen was up 9 percentage points at 57%, while the amount of women who felt that way was unchanged at 50%.

The number of people who said their personal finances were improving was unchanged at 23% in July from June, but was down from 25% during May. Respondents who see their personal finances getting worse was up 2 percentage points to 49%.

Sad smile  Productivity, Labor Costs Rise

Nonfarm business productivity, the output per hour of all workers, rose at a 1.6% annual rate in the second three months of 2012, the Labor Department said Wednesday. Unit labor costs were up 1.7% during the period.

In the first three months of the year, productivity declined to a 0.5% annual rate and labor costs were up 5.6%, according to revised data released Wednesday.

First quarter unit labor costs grew primarily because of a large upward revision to hourly compensation, the Labor Department said. (Charts and table below from Haver Analytics)






U.S. Foreclosure Filings Drop 10% as States Slow Process

Nationwide, foreclosure filings of all types fell 3 percent from June. Initial notices were sent to 98,174 homes, a 6 percent decline.



Lightning  [image]Declining Output Highlight Europe’s Weakness

Industrial output in the euro zone showed signs of retreat in June, with Spanish production declining for its 10th straight month and German output weakening even more than expected.

Germany’s industrial output fell 0.9% MoM in June in adjusted terms, partly unwinding a 1.7% gain in May but adding to April’s 2.3% drop. For Q2, German IP is down 1.5% or -5.9% annualized.

U.K. Posts Record Trade Deficit

The U.K. has posted its largest overall trade deficit since comparable records began 15 years ago, indicating weak demand for British goods is hampering the country’s efforts to trade its way out of recession.

Lightning  Exports of goods fell 8.4% in June from May to £23.5 billion, driven by a record monthly fall in foreign oil sales, particularly to non-European Union countries including the U.S., a drop in foreign sales of chemicals, and weaker exports of cars including to China.

BoE is running out of policy options
Questions raised about how to use monetary policy to boost demand

One of these might be a further cut in the Bank rate to, say, 0.25 percentage points, a move Sir Mervyn King, BoE governor, suggested might not only fail to help much but could also be counterproductive because banks would not earn high enough profits from new loans. Confused smile

Lightning  French central bank warns on recession
Industrial confidence at lowest level since 2009

In its first estimate for the third quarter of 2012, the Bank of France said it expected gross domestic product to fall 0.1 per cent. This would follow a similar decline in the second quarter, it predicted, meaning the country would be officially in recession for the first time since spring 2009.

France’s national auditor, the Cour des Comptes, has already told François Hollande, the French president, he will need “unprecedented” savings of about €33bn in 2013 to reach the deficit targets.

Lower than expected growth could require even more drastic cuts, a hugely sensitive issue for a Socialist government elected on an “anti-austerity” platform.


Lightning  Greek Jobless Rate Still Rising

Greece’s unemployment rate hit a new high in May, continuing to mount as the country struggles through a fifth year of recession.

The rate rose to a record 23.1% from 22.6% in April, the national statistics agency Elstat said Thursday. It was 16.8% a year earlier.

Elstat said that the number of Greeks without jobs now stood at 1.15 million, compared with 3.82 million who were in work. Since May 2011, the number of people in work has fallen by 320,540.

Lightning  Adecco sees hard times for Europe’s job seekers

Job markets in the euro zone are unlikely to emerge from a paralyzing debt crisis anytime soon, Adecco , the world’s largest temporary staffing group, said, as it reported big falls in revenues from markets like France, Spain and Italy.

“We shouldn’t expect anything positive for the euro zone overall before next year,” Chief Executive Patrick de Maeseneire told Reuters in an interview on Thursday.

Fingers crossed  ECB determined to have strong impact on market: Noyer

The European Central Bank is determined to bring down the excessive borrowing costs hurting Spain and Italy and should be ready to intervene decisively in bond markets very soon, ECB governing council member Christian Noyer said on Thursday.

“Don’t have any doubt about the determination of the governing council and its capacity to act within the terms of its mandate,” Noyer told Le Point magazine in an interview.

“Our operations will be of sufficient size to have a strong impact on the markets. We should be ready to intervene very soon, prioritizing short-term debt markets,” he added.

ECB President Mario Draghi had indicated last week that the bank would not be ready to enter the market before September and only if governments activated the euro zone’s bail-out funds to join the ECB in bond buying.



Storm cloud  India Industrial Output Slides in Sign Economy Is Faltering

Production at factories, utilities and mines declined 1.8 percent from a year earlier, after a revised 2.5 percent rise in May. Manufacturing fell 3.2 percent in June from a year earlier, today’s data showed.

Storm cloud  Turkish Industrial Output Growth Slows

The Turkish lira was a touch lower following data showing that June industrial production growth was lower when compared with the previous month.

June production—the leading indicator of economic output—gained 2.7% on the year, below the 3.3% forecast by analysts polled by Dow Jones Newswires and less than half the May expansion of 5.9%. On a seasonally adjusted basis, production fell 2% in June compared with the previous month.

Surprised smile  NEGATIVE U.S. GDP SOON?

David Rosenberg issues this big warning:

“I think that there may be a time, before too long, when we will walk into the office to find that they US prints a negative GDP reading on the back of a negative export shock that does not appear to be in any forecast – let alone the consensus.  Look at the pattern of ISM export orders:

– April 59,  May 53.5,  June 47.5,  July 46.5

This is called a pattern.  And this is a level that coincided with the two prior recessions.  As the chart below vividly illustrates, there is a significant 81% correlation between annual growth in total US exports and the ISM new orders index (with a 4 month lag).  So either the market has already priced this in or it is going to end up coming as a very big surprise….” (via PragCap)

Nestlé Warns of U.S. Slowdown

The world’s largest food company by sales, maker of Kit Kat chocolate bars and Nescafe instant coffee, said the trading environment in North America in particular was “challenging” as sales volumes there declined.

Sales volumes increased by 2.9% overall, but this was driven mainly by emerging markets in Asia, Oceania and Africa, where growth is being fueled by rising incomes. In the Americas, sales volumes fell by 0.1%, and in Europe they increased by just 0.1%.


NEW$ & VIEW$ (9 July 2012)


Doubts Emerge in Rescue Deal

[image]Euro-zone countries would still have to guarantee the loans their banks receive from the region’s permanent bailout fund, the European Stability Mechanism, even if it directly recapitalizes them, a senior EU official said.

“I need to make clear what the ESM can do: The ESM is able… to take an equity share in a bank. But only against full guarantee by the sovereign concerned,” the official said. He added that while the member state’s guarantee wouldn’t directly show on the government’s official debt burden, the loan “remains the risk of the sovereign.” (…)

In the days after the meeting, the Finnish and Dutch government said they would block another measures designed to ease the pressure on Italy and Spain – making it easier to deploy the bailout funds to purchase the bonds of struggling governments.

The FT adds:

“It’s a bit rich that Mr Monti goes around declaring that there was a unanimous position on intervention in secondary markets, which is simply untrue,” one Finnish diplomat said. (…)

In a petition published this week, more than 160 German academics demanded that Angela Merkel, chancellor, should abandon any summit concessions that would increase taxpayers’ liability to the struggling eurozone governments of the periphery.

The petition urged voters to pressure Ms Merkel, and said her decision at the summit was “wrong”.

Last week’s The Economist warned:

MUCH of the world outside Germany may be under the impression that neither Angela Merkel, the chancellor, nor the German parliament is acting fast or zealously enough to avoid a collapse of the euro zone. Inside Germany, a different view is taking hold: Mrs Merkel and even parliament may be forging ahead too fast, and possibly with unconstitutional zeal. It so happens that this view seems to hold sway in a crucial constituency: the red-robed judges of the federal constitutional court in Karlsruhe. (…)

The problem, however, is that Germany and other EU countries have, in the two years of the euro crisis, already ceded parts of their sovereignty to EU institutions and are being asked to cede ever more. Karlsruhe worries that there will come a point when Germany has given up so much power that parliament becomes irrelevant, says Dieter Grimm, a former judge on the federal constitutional court. Voters would then be reduced to checking boxes on ballots, without any actual say in matters of government. Germany’s constitution forbids this. An “eternity clause” in Germany’s constitution says that certain things, above all democracy, can never be changed, even by parliament. (…)

Andreas Vosskuhle, the president of the federal constitutional court, has recently expressed his general concern that “essential decisions are negotiated in the anonymous thicket of the Brussels bureaucracy, in nightly sessions of the European Council, or somewhere else, without adequate public discussion and influence.” Budgeting decisions, in particular, must remain in the power of elected representatives, he thinks, adding: “It would be tragic if we were to lose democracy on the way to a rescue of the euro and more integration.”

Wolfgang Schäuble, the finance minister, has now broken a taboo of sorts by predicting that the Germans will probably have to change or replace their constitution in a plebiscite. Mrs Merkel, caught off guard, agrees in principle but thinks such a referendum still lies far in the future. The federal republic has never had one, although its constitution allows for plebiscites. Yet, even a plebiscite may fall foul of the eternity clause. Karlsruhe may conclude that, for European integration to proceed, the EU itself must first become genuinely democratic.

Der Spiegel wrote about Merkel’s disappearing majority and polled Germans:

Germany’s center-left opposition, in particular, is demonstrating an increasing unwillingness to support Merkel’s strategy for plugging the euro-zone dike. That combined with significant numbers of rebels within her own government coalition, which pairs her conservatives with the business-friendly Free Democrats, could spell danger to the chancellor in the near future.

A new SPIEGEL ONLINE survey reveals that a narrow majority is opposed to any more bailouts, and almost three-quarters of Germans want stricter fiscal oversight from Brussels.

On the question of the single currency and its survival, the majority — 54 percent — believes that Germany should not continue to fight to save the euro if it has to provide additional billions in aid. A sizeable minority (41 percent) disagrees, however, while 5 percent are undecided.



On the same WSJ page last Saturday:

On the next page:

The FT:

How bad was it? Economists are as divided as ever Confused smile. Last Friday, I wrote ODDS OF A U.S. RECESSION RISING on the basis that slowing employment coupled with slow wage growth, zero stimulus, rising tax rates and already low savings could restrict real consumer expenditures to less than 1% growth during the second half of 2012 compared to 1.8% on average during the first 5 months of the year.

Note that employment growth began to weaken considerably in April after hopeful signs of accelerating growth during Q1. Real expenditures grew at a 3.2% annualized rate in Q1 but stalled completely in April (0.0%) and May (-0.2%). True, higher gasoline prices hurt. Still, growth in real PCE ex-food and energy slowed from +2.8% annualized in Q1 to +1.2% annualized in April and May.

Oil prices have recently come down some but so has employment growth.

Pointing up  American corporations are operating in a highly uncertain world, including the U.S. fiscal policy. No wonder they act prudently. But then, no wonder American part-timers are spending cautiously as well…(Chart from NBF Economics and Strategy Group)


Much has been written on the steep and continuing decline in the U.S. participation rate, a significant factor in the U.S. economic picture since it keeps the unemployment rate artificially low. To explain the decline in the PR, I have shown that many young Americans have gotten back to school during the crisis. IBD found another factor:

 image(…) the number of new disability enrollees has climbed 19% faster than the number of jobs created during the sluggish recovery. (Even after accounting for people who left the disability program because they died or aged into retirement, disability ranks have climbed more than 1.1 million in the past three years.)

And the disability ranks will continue to swell. In just the last month, almost 275,000 put in applications for disability benefits. Experts say that more people try to get on disability when jobs are scarce, and changes to eligibility rules enacted back in 1984 have made it far easier to qualify.

Again, nothing to spur spending.


During the 2010 and 2011 soft patches, Warren Buffett kept saying there was no recession coming, on the basis of his reading of Berkshire Hathaway’s business results, particularly Burlington Northern. Here’s the latest report from The Association of American Railroads:

imageExcluding coal and grain, U.S. carloads in June 2012 averaged 151,363 per week in June 2012, up 4.2% (24,138 carloads) over June 2011 and their highest weekly average since August 2008. However, the 4.2% increase in June 2012 was the lowest such rate of increase since August 2011.

High five  imageHowever, note on the chart how the SA carloads (red line) have flattened out in 2012. Furthermore, the AAR stats show that the breadth has significantly deteriorated in June:

All told, 9 of the 20 carload commodity categories tracked by the AAR saw gains in June 2012 compared with June 2011, the lowest number since May 2011

Not very surprising given the decline in new orders of the past several months.


Storm cloud  OECD composite leading indicators point to easing in the pace of economic activity in major economies

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to an easing of economic activity in most major OECD economies and a more marked slowdown in most major non-OECD economies.



The Eurozone problems are clearly contaminating the ROW. China was first but the U.S. is now clearly getting sick as well. FT’s Gavyn Davies thinks lower oil prices will save us all.

The Goldman Sachs Global Leading Indicator, which is relevant because it contains “hard” global data rather than equity prices, suffered an across-the-board decline last month. Goldman economists noted that this was the most generalised signal of weakening seen since the Lehman crisis.

The pattern of mid-year economic weakness has, of course, been seen before in both 2010 and 2011, and it is possible that quirks of the seasonal adjustment process are still exaggerating the slowdown. But the bigger picture does look troublesome. A glance at the top chart shows that the rebound in global activity from mid 2009 to mid 2011 has not been sustained. There have been mini cycles in the data, but there is no doubt that the world economy is finding it difficult to sustain a growth rate which is at or above its long term trend. (…)

But the main problem on the supply side stems from commodity prices, especially oil. Several times in the past few years, rising oil prices have put the brakes on the world economy, raising headline inflation rates despite the large amounts of spare capacity in the domestic economies in America and Europe. That is what happened late last year. With oil prices now off their peaks, this “oil regulator” should soon work to boost economies, which is why the mini-cycle may experience another upswing before the end of 2012.

Let’s see what the Saudis, who budget with $100 oil, think about that!


Gulf OPEC States Oppose Prices Meeting

“Talks about emergency meeting would have made sense a few days ago when prices dropped, but now the idea seems far-fetched,” another delegate said.

Brent crude Friday went up to $98.19 a barrel, up from below $90 a barrel a few days ago.

“If we were to call for a meeting it would be to discuss oil prices, but right now prices are rebounding and will likely rise further due to the political tensions with Iran and the economic situation in Europe,” a Gulf OPEC delegate said. “Right now we don’t see any need or worry to hold an emergency meeting.”

Storm cloud  Asian data signal drop in global demand

Surprised smile Japan’s core machinery orders in May plunged 14.8 percent from April, with the key gauge of capital spending sinking far below analyst expectations of a 3.3 percent decline. (…) (Chart from Reuters’ Scott Barber)

Exports from Taiwan, one of the world’s largest producers of electronics, declined in annual terms for a fourth straight month in June against market expectations of a modest rise.

German exports rebound in May
Data offer hope to struggling eurozone periphery

Exports increased by a seasonally adjusted 3.9 per cent while imports jumped by 6.3 per cent, according to Federal Statistics Office data.

Keep in mind that April was pretty bad.
Martini glass  French business calls for ‘shock’ action
Appeal to Hollande for urgent steps to boost competitiveness

French business urgently requires shock treatment to cut labour costs and boost its flagging ability to compete on international markets, top economists and business leaders have warned François Hollande.

They point the finger in large part at France’s high labour costs, caused by the financing of big social welfare programmes through charges on employers and employees. 

Joining the call, Henri Proglio, head of EDF, the state-controlled electricity company, told the conference hourly wage costs averaged €34 in France, compared with €30 in Germany and €20 in Spain and the UK.

May I remind you of this June 6 headline:  Hollande’s First Step Backward Lowering the retirement age from 62 to 60 puts France closer to another downgrade.

Proposals to lower the pension age for other categories of workers are said to be in the works, though this first step alone is expected to cost €1.1 billion next year, rising to €3 billion a year by 2017. The government will cover the expense by—surprise, surprise—raising employees’ and employers’ payroll taxes.

And, as The Economist wrote (Adieu, la France), 

Michel Sapin, the labour minister, has promised to make it so expensive for companies to lay off workers that it will no longer be worth their while. Firms that fire people while still paying dividends may be penalised. Another planned ruse is to force companies to sell factories, presumably along with the brands manufactured there, to competitors rather than close them down.

Thumbs down  No way in Norway:  Norway loses patience with oil strikers  Little sympathy with demands to retire at 62 instead of 65 on full pension

Storm cloud  Bleak outlook from ‘peak steel’
Signs appear that global demand is dramatically slowing

Has the age of “peak steel” – in which world steel annual output and demand reaches a plateau at about its current level of 1.5bn-1.6bn tonnes – finally arrived? A growing number of industry observers are edging towards answering “yes” to this question, with the implications of what this means unsettling for many in the sector.

Rod Beddows, chief executive of Hatch Corporate Finance, which specialises in metals, says there is “massive pessimism” in the steel industry about current conditions and future prospects, with the worries being most intense in Europe. “A lot of companies are floundering and not sure about how to alleviate the problems linked to overcapacity. New thinking is required but seems absent.”

Peter Marcus, managing partner of World Steel Dynamics, a US consultancy, says: “For the next five years the steel industry faces a rutted road strewn with potholes. A lot of companies are going to find it hard to make money.”


imageFor the second month running, Automobiles & Parts posted the fastest decline in production of all 22 sectors. The rates of contraction of both output and new orders were the strongest since April 2009, exceeding those seen at any time in the survey’s 14-year history with the exception of the height of the 2008-09 recession. Official data showed a 1.0% year-on-year fall in auto production in April, and the PMI data are consistent with that accelerating to double-digit rates of contraction in May and June. (Markit)


Half-year auto sales remain fast   A strong June has ended a solid six-month sales performance by China’s passenger vehicle manufacturing industry.

Total national sales of cars, sports utility vehicles, multi-purpose vehicles and minivans reached 7,009,117 units in the first six months in China, boosted by strong monthly sales of 1,148,873 units in June alone, which saw 12.4 percent growth from a year earlier, the China Passenger Car Association revealed on Friday.


Beware! First, these are shipments to dealers, and we have read about the very slow final sales throughout 2012. Second, monthly shipments show no growth over the last 6 months. Unless final sales pick up measurably, second half headlines will need to change…

Smile  China’s Inflation Eases

China’s consumer inflation eased sharply in June, likely one key reason why the country’s central bank was comfortable cutting benchmark interest rates twice in less than a month.

China’s consumer price index rose 2.2% in June from a year earlier, slower than May’s 3.0% rise, data from the National Bureau of Statistics showed Monday. June’s inflation was the lowest since January 2010, when CPI rose 1.5% year on year.

From a month earlier, the CPI declined 0.6% in June. It fell 0.3% in May.

image image

Food prices, which account for nearly one-third of the weighting in the calculation of China’s CPI, increased 3.8 percent last month from one year earlier, down from 6.4 percent in May.

The producer price index fell 2.1% in the month from a year earlier, after dropping 1.4% in May. The PPI declined 0.7% in June from May, when it fell 0.4% from the preceding month.

Pointing up  Wen urges aggressive fine-tuning measures  Chinese Premier Wen Jiabao has called for more aggressive efforts to preset and fine-tune fiscal policies, as economic pressures remain huge.

The government should manage its policies in a more aggressive manner, while sticking to pro-active and prudent monetary policies, according to the premier.

But what will China do? It can only try to boost domestic consumption, including housing.


What Beijing wants: China Must Prevent Rebound In Property Prices, Wen Says

China must “unswervingly” continue its property controls and not allow prices to rebound, the official Xinhua News Agency cited Premier Wen Jiabao as saying.

Property controls are at a “critical period” and the task remains “arduous,” Wen was cited as saying. Restricting the demand of speculative property investments must be made a long- term policy, he said.

Market expectations about property prices are changing and citizens are worried prices will rebound, he said. Signals in the market are currently “messy” and the country needs to restrict misleading and speculative information, Wen said, according to Xinhua.(…)

“All financial institutions must continue to strictly implement a differentiated housing credit policy to continue curbing property buying for speculation and investment purposes,” the central bank said in its interest-rate statement on July 5.

What’s really happening: 

China’s southern metropolis of Guangzhou saw a continued housing market rebound in June after the central bank cut interest rates to stimulate the economy.

Property developers sold 8,952 units of new homes in the provincial capital of Guangdong last month, up 25 percent from a year earlier, according to a statement on the website run by the city’s land resources and housing management bureau.

Sales on June 28 and 29 marked this year’s daily record of 553 units each day.

Pointing up  The sales boom pushed the prices of new homes up 10 percent year on year and 3.5 percent month on month, it added.

The housing market started to rebound early this year in major Chinese cities, as potential buyers snapped up bargains when the one-year government curbs, including purchase restrictions, higher lending rates and a ban on mortgage loans on third homes, drove down prices.

The interest rate cuts, the first in four years, sent many panicked buyers into the market after dashing their hopes that the housing market would see further correction.

A rebound has also been seen in Beijing, as sales of both new and existing homes in China’s capital reached 25,602 units in June, 10.5 percent more than in May and 50.6 percent more than June 2011, official data showed.

“The momentum of the property market had already picked up as developers reported good June sales,” said Nicole Wong, a Hong Kong-based property analyst at CLSA Asia-Pacific Markets. “The second round of interest rates cut will just drive the momentum better and better.”

Hmmm…The shift from inflation fighting to growth stimulation seem underway. With house prices still “unreasonably high”, the Party is getting on a dangerous road.


Q2 earnings season begins today.

Since the start of the second quarter (March 31), the earnings growth rate for the index has declined to 3.0% from 6.8%. Nine of the ten sectors have recorded a decrease in earnings growth rates during this time, led by the Energy and Financials sectors. The Telecom Services sector is the only sector that has witnessed a slight increase in projected earnings growth since March 31. (Factset)


EPS Guidance: More Negative Relative to Q1

Of the 102 companies that have issued EPS guidance for the current quarter, 72 have issued projections below the mean EPS estimate and 30 have issued projections above the mean EPS estimate. For Q1 2012, 67 companies issued projections below the mean EPS estimate and 44 companies issued projections above the mean EPS estimate. The Consumer Discretionary sector has seen the largest increase in the number of companies issuing negative EPS preannouncements and the largest decrease in the number of companies issuing positive EPS preannouncements in Q2 2012 relative to Q1 2012. (Factset)

For what it’s worth, 9 companies have also pre-announced on Q3: 8 negative and 1 positive.

Companies now are being hit on several fronts. Economies in China, Europe and the U.S. are slowing. That is hurting companies dependent on demand from those countries. As well, the U.S. dollar has jumped against the euro and other currencies, reducing profits made from international sales for U.S. companies. Ford last month cited heavier-than-expected losses outside North America when it said it would report “substantially lower” pretax profit for the second quarter. (WSJ)




On Unhappy Returns and No Refunds

Three Louisiana pension funds that invested with a Fletcher Asset Management hedge fund four years ago thought they were getting an impressive combination of high returns and safety. Now they are wrangling in court and facing a potentially far different outcome.

Such combination does not exist. Period.