NEW$ & VIEW$ (30 SEPTEMBER 2013)

Back from Europe, up quite early with much in the news. I strongly encourage you to read this post through the end. There is much to consider, especially on the earnings side, while most economies are showing poor momentum, if any.

Government Heads Toward Shutdown

The nation braced for a partial shutdown of the federal government, as time for Congress to pass a budget before a Monday midnight deadline grew perilously short and lawmakers gave no signs Sunday they were moving toward a resolution.

(…) The stalemate was a monument to problems that have increasingly gripped U.S. politics, especially over the last three years of divided government. The growing polarization of the parties, a diminished willingness to compromise on spending and an epidemic of brinkmanship have made it more difficult for Congress to address even the most routine budgeting questions.

Mr. Obama and other Democrats have said that agreeing to GOP demands now would invite Republicans to press for more in the future, with each fiscal deadline. Next up is a battle over terms for raising the nation’s borrowing limit, which the Treasury says must be approved by mid-October. Most economists predict that the financial consequences of failing to raise the debt limit would be greater than a government shutdown. (…)

Uncertainty Poses Threat to Recovery

(…) “American businesses have this mentality where no one wants to make a decision because you have no idea what’s lurking around the corner,” said Jeremy Flack, president of Flack Steel, a Cleveland steel distributor. “Government needs to make us feel more solid about the state of affairs, and they’re doing the exact opposite.”

Flack Steel’s business took a hit from all three crises in 2011 and 2012. “You can watch our earnings evaporate three months after each event,” Mr. Flack said. “Our customers start pulling back their business” in the weeks around every fiscal deadline in Washington. (…)

Sinking Feeling

Fiscal warfare can harm the economy directly and indirectly. Cutting government services—either temporarily in a shutdown, or permanently through spending reductions—can disrupt a broad range of commerce and hit American workers and businesses tied to the public sector. Indirectly, the annoyance from disruptions alongside the threat of damage to markets and the economy can dent confidence and weigh on corporate planning. (…)

In August, one benchmark of economic confidence registered its first decline in six months. The Equipment Leasing and Finance Association’s index of new business was down 11% from July—and 7% from August 2012.

The drop in the index, which measures leasing and financing activity for commercial equipment used in technology, health care, energy and other sectors, is due to waning confidence, said Adam Warner, president of Key Equipment Finance, the Colorado-based arm of financial-services firm KeyCorp.

Instead of stepping up their leasing, businesses are postponing commitments. “They are thinking,‘Let’s push this off and see what’s going to happen,. Is the economy going into a tailspin because of a possible government shutdown?'” Mr. Warner said.

Such retrenchment ripples through the broader economy and can be a bellwether for the labor market. “When a business is acquiring equipment, chances are you are going to be hiring someone to operate that equipment,” Mr. Warner said. “When we see a fall in that activity, typically there is going to be less employment.”

Italy Makes Final Bid To Save Government Prime Minister Letta launched a last-ditch effort to rescue his government from collapse after Silvio Berlusconi pulled support for the government, plunging Italy into a fresh political crisis.

image(…) Italy’s political chaos, which inflamed the euro-zone crisis two years ago, could be the biggest test so far of Europe’s defenses against a revival of the financial panic that has afflicted the region in recent years. This time, faith in the European Central Bank’s promise to safeguard stability is so strong that many political leaders and economists believe a full-blown run on Italy’s bond market is unlikely.

If Mr. Letta loses Wednesday’s vote, Mr. Napolitano, who has opposed calling new elections, has signaled he would try to piece together Italy’s fourth government in two years, either headed by Mr. Letta or another figure. But that attempt is likely to take weeks. (…)

The government crisis now threatens to thwart the recovery of the Italian economy, which is badly in need of reforms to help pull it out of a two-year recession and create jobs. While Mr. Letta passed some modest measures, his five-month government has been largely paralyzed by infighting. (…)

Meanwhile, the absence of a government could actually lower Italy’s budget deficit and bring it closer to the European Union-mandated limit of 3% of gross domestic product. That would happen because of existing measures that were to be scrapped, including an unpopular property tax on primary residences, a scheduled increase in the value-added tax rate and a tax amnesty for the gaming industry would remain on the books, bringing in more than €3 billion in revenue.

Even if Italy survives this latest political upheaval without reigniting bond-market turmoil, its current travails betray deeper problems that threaten Italy’s longer-term solvency and ability to prosper inside the euro zone. Italy’s political class has struggled to deal with the underlying causes of the country’s malaise, including a loss of international competitiveness and the stagnant productivity of its business sector that began well before the European financial crisis of recent years.

The economy’s meager growth rates have pushed up the national debt to over 130% of gross domestic product. The level of debt could become critical if investors conclude that Italy’s long-term growth prospects are so poor that the debt will rise endlessly. Unlike other crisis-hit countries such as Spain and Greece, Italy has yet to implement major economic overhauls or to push down labor and other business costs to levels that would make its industries more competitive abroad.

Companies Holding Lots More Cash

U.S. nonfinancial companies has $1.8 trillion in cash on their books at the end of the second quarter, according to the Federal Reserve’s quarterly “flow of funds” report (now known formally as the “Financial Accounts of the United States”). (…)

The sharp rise in holdings of hard cash doesn’t appear to reflect a broader caution among executives. The $1.8 trillion in liquid assets — the line item most people are referring to when they talk about “corporate cash” — accounted for 5.4% of all assets held by nonfinancial corporations in the second quarter, down from 6% in 2009 and pretty much flat for the past two years. (…)

U.S. Personal Income Gain Leads Personal Consumption Higher


Personal income in August matched expectations and increased 0.4% (3.7% y/y) following a 0.2% July rise, revised from 0.1%. An improved 0.4% increase (3.5% y/y) in wage & salaries followed a 0.3% July decline. (…) Disposable personal income increased 0.5% (2.8% y/y) and inflation adjusted take-home pay rose 0.3% (1.6% y/y).

Personal consumption expenditures improved 0.3% (3.2% y/y) last month after a 0.2% rise in July, revised from 0.1%. The gain also matched expectations. Spending on durable goods jumped 0.5% (5.9% y/y) as motor vehicle purchases gained 1.1% (7.7% y/y). Home furnishings purchases rose 0.2% (4.4% y/y) with the strength in home buying; but spending on apparel fell 0.5% (+2.2% y/y). (…)  Adjusted for price changes, personal consumption rose 0.2% (2.0% y/y).

The personal savings rate moved up to 4.6% but remained down slightly from 4.9% twelve months earlier.

The PCE chain price index inched 0.1% higher (1.2% y/y) in August and matched the July rise. Durable goods prices again fell 0.3% (-1.9% y/y) while prices for nondurables rose 0.2% (0.4% y/y). Services prices increased 0.2% (1.9% y/y). Less food & energy, the chain price index rose 0.2% (1.2% y/y).


Nominal spending matched income growth since June at 1.1% or 4.4% annualized. In rwal terms, personal expenditures are up 0.5% during the last 3 months or 2.0% annualized.

Fingers crossed  Gasoline Prices Stall Out

Prices for gasoline on the New York Mercantile Exchange have fallen roughly 11% in September as supplies reached their highest level in three years and the peak summer driving season ended. (…)

“We have plenty of supplies and low levels of demand. The fundamental picture isn’t pretty,” said Addison Armstrong, senior director of market research at Tradition Energy, an energy-investment adviser in Stamford, Conn. (…)

In the U.S. retail market, the price of regular gasoline averaged $3.42 a gallon on Friday, a decline of 13 cents from a month earlier and down 38 cents from a year before, according to AAA. (…)

 Tighter Mortgage Standards Stalling Recovery

(…) The paper was written by Jim Parrott, a former housing advisor in the Obama White House who is now a senior fellow at the Urban Institute, a left-leaning think tank, and Mark Zandi, chief economist of Moody’s Analytics.

The clearest sign of tighter credit standards are seen in average credit scores, which in June stood nearly 50 points above their pre-housing bubble levels. Credit scores are not only higher, but they also understate the quality of recent borrowers, who have earned these scores during a much tougher environment. In the early 2000s, borrowers had an easier time building their credit because unemployment was low and home prices were rising. In other words, a 750 credit score coming out of the financial crisis counts for more it did ten years ago.

Easing lending standards to return credit scores to pre-bubble levels would boost home sales by around 450,000 units and new single-family home construction by around 275,000 units, according to estimates from Zandi. (…)

Parrott and Zandi concede there’s little evidence that credit is tighter based on either average loan-to-value ratios and debt-to-income ratios. But they say there are other problems, particularly around banks’ verification of borrowers incomes, scrutiny of appraisals, and other factors that have led to a tighter credit box. (…)

The problem is that Fannie, Freddie and the [Federal Housing Administration] have stepped up their put-backs in ways that lenders cannot address adequately through better underwriting or pricing. This includes disagreements over judgment calls made by lenders or their agents; changes in circumstances occurring after the underwriting process has been completed; small mistakes that bear little relation to either the credit risk or the subsequent default; and inconsistent interpretations of the rules.

The upshot is that because lenders can’t predict how they could be penalized, they’ve chosen to lend less. This last point is the most important, the authors said, because it’s the one where policymakers can exercise the most control.

But the problem is difficult to solve because it’s not as easy as changing specific lending criteria. As it is, banks are putting in place standards that go beyond those required by Fannie, Freddie or the FHA. What’s needed instead, the authors argue, is better clarity around when banks could be forced to take back loans. Regulators overseeing those housing entities, they write, “must embrace the challenge with a good deal more urgency” than they have so far.

Mexico struggles to stem faltering growth Tepid US recovery and catastrophic floods weigh on GDP

(…) Though there have been some newly encouraging signs – such as a boost in retail sales in July for the third month running and promising economic activity data that could help rev up growth – the Ingrid and Manuel storms that battered both coastlines simultaneously will only deepen Mexico’s sudden slowdown in gross domestic product growth.

The storms, which killed at least 147 people and caused an estimated $6bn in damage, are likely to trim another 0.1 per cent off 2013 growth, bringing this year’s official forecast to 1.7 per cent, Luis Videgaray, finance secretary, has concluded. That is less than half the 3.5 per cent predicted last December when Mr Peña Nieto took office and Mexico was the region’s success story.

With government aid already expected to exhaust a 12.5bn peso ($950m) emergency fund, some economists consider even the lower growth target too generous.


Fed May Not Start Taper Until January

(…) “We’re not on a pre-set course,”Charles Evans, president of theFederal Reserve Bank of Chicago told reporters on the sidelines of a monetary policy conference in Oslo. He said the Fed’s decision to start reducing its $85 billion in monthly bond purchases “could be in October, it could be in December, but it also could be at the January meeting.”

Mr. Evans was among ten central bank officials who have expressed a wide range of views on the program since their most recent policy meeting September 17-18. (…)


German August Retail Sales Rose While Missing Estimates

Sales adjusted for inflation and seasonal swings increased 0.5 percent from July, when they fell a revised 0.2 percent, the Federal Statistics Office in Wiesbaden said today. Sales advanced 0.3 percent from a year earlier.

Renewed decline in eurozone retail sales in September

Retail PMI® data from Markit showed a renewed decline in eurozone retail sales in September. The Markit Eurozone Retail PMI eased below neutrality to 48.6, having signalled the first increase in sales in nearly two years in August. The average PMI reading for Q3 (49.5) was nevertheless the best since Q2 2011.

The overall drop in retail sales mainly reflected a fresh contraction in France following two months of growth, and an ongoing decline in Italy. Encouragingly, the fall in Italian retail sales was the slowest in two years. German retail sales rose at the weakest rate in four months.



Euro-Area September Inflation Slows More Than Forecast on Energy

Consumer prices rose an annual 1.1 percent after a 1.3 percent increase in August, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 34 economists was for 1.2 percent growth. The core inflation rate, which excludes volatile food and energy costs, was 1 percent.

Siemens Targets 15,000 Job Cuts

Siemens AG, the German industrial giant, said Sunday that it will have cut a total of about 15,000 jobs world-wide by the end of the next business year, defining for the first time the scope of the reductions it plans under a two-year restructuring program aimed at boosting profits.

Jobs eliminated during the business year that ends Monday account for about half the total. Another roughly 7,500 jobs will be cut in the new business year, which begins on Oct. 1, a company spokesman said. (…)

Spain Outlines Austere 2014 Budget

Government ministries will get on average 4.7% less funds to spend next year, the budget minister says with eyes on an economic recovery.

The Spanish government outlined an austere 2014 budget that includes further cuts in spending by its ministries and a salary freeze for public employees despite the country’s emergence from recession.

The budget highlights the huge imbalances created by five years of economic crisis: Spain will set aside €36.6 billion ($49.5 billion) to service its fast-rising pile of public debt, €2 billion more than it will spend on the 13 government ministries.

And it is pledging about €31 billion for welfare and entitlements, up almost 20% from last year. That includes unemployment benefits for the more than a quarter of the working population that is registered as out of work. (…)

Spain will keep public sector wages frozen for a fourth straight year, while pensions will grow by a meager 0.25% next year.

On Friday the government raised its estimate for gross domestic product growth next year to 0.7% from an April estimate of 0.5%. It said private consumption, which has been depressed since Spain’s massive housing bubble burst in late 2007, will grow marginally next year and exports will keep growing at a robust pace.

Finance Minister Luis de Guindos said he expects the economy to start adding jobs in the second half of next year. (…)

Medvedev Warns on Economy

Prime Minister Dmitry Medvedev renewed calls for Russia to end state dominance of the economy and take steps to boost smaller firms to avoid an economic “abyss.”

(…) In a commentary for the country’s leading business daily Vedomosti and a keynote address to an investment forum Friday, Mr. Medvedev presented the gloomiest picture of Russia’s challenges by a top official since its economy started slowing a year and a half ago.

“We are at a crossroads,” he said in the newspaper article. “Russia may continue to move slowly with a close to zero economic growth, or make a leap forward. The latter is risky, but the former is…even more dangerous; it’s a path to the abyss.”

The government last month cut its growth forecast for this year to 1.8%, far below that over-5% expansion called for by President Vladimir Putin. Russia’s economy grew at 7.2% per year from 2000 to the peak of the global financial crisis in 2009, fueled by huge oil and gas revenues.

Mr. Medvedev said the economy could no longer rely on state investments and spending for growth. (…)

In the article and the speech, Mr. Medvedev called for more security for investors by strengthening the rule of law, without mentioning the word “corruption,” which many investors call one the main Russia’s problems.

Mr. Medvedev noted that the state budget and state-controlled companies were the main drivers of the growth in recent years, calling for steps to help small- and medium-size companies grow.

“Amid slowing economic growth we must ensure that the state is not taking up unreasonably large role in the economy,” he said.

Jump in output hints at S Korean recovery
Industrial production at nine-month high


New figures from Korea’s National Statistical Office showed output jump 1.8 per cent in August, pulling up the year-over-year gain to 3.3 per cent from 0.9 per cent in July.

HSBC called the figures “particularly impressive” in light of recent strikes in the auto industry and argued the data is indicative of resiliency that could fuel a broader rebound:

Korea is well poised for meaningful recovery towards year-end. But while economic activity is still below potential, the Bank of Korea will likely maintain an accommodative stance. We expect rates to stay on hold at 2.50% on 10 October.


[image]Now that the dreaded September is past, keep your fingers crossed for another month. Over and above all the political farces, Q3 earnings season officially begins shortly.

High Time for Profits to Catch Up to Stock Prices

(…) earnings growth has been in the mid-to-low single digits since the middle of 2012. The third quarter is seen registering 3.5% growth, according to S&P. Earnings grew by 3.8% in the second quarter. (…)

Here’s the latest Factset:

  • The estimated earnings growth rate for Q3 2013 is 3.2%. The Financials sector is
    predicted to report the highest earnings growth for the quarter, while the Health Care sector is predicted to report the lowest earnings growth for the quarter.
  • Earnings Revisions: On June 30, the earnings growth rate for Q3 2013 was 6.5%. All ten sectors have recorded a decline in expected earnings growth over this time frame, led by the Materials sector.
  • Earnings Guidance: For Q3 2013, 89 companies have issued negative EPS guidance and 19 companies have issued positive EPS guidance. As a result, 82% (89 out of 108) of the companies that have issued EPS guidance for the third quarter
    have issued negative EPS guidance. This percentage is consistent with the percentage recorded in the previous quarter at this time (81%), but well above the 5-year average of 62%.
  • Earnings Scorecard: Of the 17 companies that have reported earnings to date for Q3 2013, 12 have reported earnings above the mean estimate and 11 have reported revenue above the mean estimate.

Over the course of the third quarter, analysts have lowered earnings estimates for companies in the S&P500 for the quarter. The Q3 bottom- up EPS estimate has dropped 2.6% (to $26.94 from $27.65) since June 30.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 4.4%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 6.4%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.2%.

Thus, the decline in the EPS estimate recorded during the course of the Q3 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages. In fact, the decline in the bottom-up EPS during the third quarter was the lowest since Q1 2011 (-0.7%).

Just kidding  Please, keep reading:

More than $1bn has been wiped off earnings estimates for Wall Street’s five biggest banks in the past month on growing fears of a sharp decline in trading revenues coupled with increased legal costs.

JPMorgan Chase has borne the brunt of forecast cuts, with consensus estimates of net income down $526m to just under $5bn. Its growing legal bills alone are expected to add $2bn in costs when it kicks off the banks’ earnings season on October 11.

But the depressed forecasts have extended to all banks with big fixed income trading operations, after several warnings of slow activity throughout the last three months. Hopes of a final trading flurry in the last few weeks of the quarter have been dashed, with fixed income trading revenues particularly hurt. (…)

Analysts reduced their expectation of net income by $210m for Citigroup, $128m at Bank of America, $123m at Goldman Sachs and $97m at Morgan Stanley, according to Bloomberg data. Those forecasts strip out the distorting effect of an accounting rule that forces companies to take profits or losses from changes in the value of their own debt.

Pointing up  Here’s the punch line from Factset:

The Financials sector is projected to have the highest earnings growth rate (9.3%) of any sector for the third consecutive quarter. It is also expected to be the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 1.9%.

At the company level, Bank of America and Morgan Stanley are the key drivers of growth in the sector, due in part to comparisons to weak earnings in the third quarter of 2012. The mean EPS estimate for Bank of America is $0.20, relative to year-ago EPS of $0.00. The mean EPS estimate for Morgan Stanley is $0.44, compared to year-ago EPS of -$0.55. If both of these companies are excluded, the growth rate for the sector would fall to -0.4%.



I have posted a lot about that. The revolution is happening but it is a zero sum game. From the losers side:

Eon chief warns of US energy advantage
Comments fuel concerns heavy industry will abandon EU

The head of Germany’s largest utility has warned it will be years before Europe can hope to counter the US’s growing advantage in energy costs and predicts that the disparity will meanwhile lead heavy industry to abandon the continent.

Johannes Teyssen, chief executive of Eon, said there were no obvious options for Europe to narrow the US advantage – whether by drilling for shale gas, importing more liquefied natural gas or importing inexpensive US supplies.

“There is a competitive advantage for America that we cannot prevent, at least for some time,” Mr Teyssen told the Financial Times. He said it was “a dream” for politicians to suggest otherwise. “It will take years and long years of innovation before we can start to shrink it,” he added.

Mr Teyssen’s comments will add to growing concerns in Europe that high energy prices are encouraging manufacturers such as chemicals companies to shift investments across the Atlantic, where the shale bonanza has reduced natural gas costs to between a quarter and a third of those in the EU. (…)

“The price difference is unnerving some companies and deciding their investments,” Mr Teyssen said, adding that the US advantage was “getting so big we cannot allow it to continue”.

Even if Europe put aside its environmental concerns and decided to pursue natural gas fracking, it would take at least five years to develop such an industry, he predicted. Instead, he said, the continent was more likely to benefit if China and Australia pushed ahead with the technology because it would free up gas from Qatar and other world suppliers. (…)


NEW$ & VIEW$ (30 AUGUST 2013)

This is a long post but I think well worth reading during the long week-end.


Second-Quarter GDP Revised Upward

The U.S. economy entered the second half of the year on firmer footing than previously estimated, with stronger growth, an uptick in corporate profits and consumers feeling better amid a rebound in housing.

[image]Strong exports, improved business investment and solid consumer spending helped U.S. gross domestic product grow at a 2.5% rate in the second quarter, the Commerce Department said Thursday. That marked a significant improvement both from the first three months of the year, when the economy grew at a 1.1% annual rate, and from the government’s earlier, preliminary estimate of second-quarter growth of 1.7%. The latest report means U.S. per capita economic output has finally—four years after the end of the recession—returned to the pre-crisis peak it reached in late 2007.

BMO Capital offers a good summary:

The good news is, the U.S. economy grew more than initially expected a month ago. The first stab at the Q2 real GDP on July 31st was 1.7% a.r. Then the trade numbers came out and wow, the view changed and it looked like GDP grew in the neighborhood of 2½% a.r. Then, as the
days went by, more data on inventories and consumer spending caused estimates to be trimmed, leaving consensus and us at around 2.2%-to-2.3% for the second quarter. Now, gentle reader, it looks like we should’ve stuck with the trade data as real GDP did rise 2.5% a.r. in Q2, the largest increase in nearly one year. That and the fact that consumer spending wasn’t revised at all (still 1.8% a.r.) is encouraging. Exports were revised up nicely, and inventories added more to the bottom line.

But perhaps the biggest surprise was the huge swing in nonresidential investment in structures (factories, buildings, etc)—initially pegged at 6.8% and is now looking like 16.1%. One should, perhaps, regard this with some skepticism, particularly as private nonresidential construction spending has been soft over the past year. Offsetting all of these pluses was a larger-than-estimated drop in government spending.

But aside from the stronger headline, underlying demand isn’t what I’d describe as … fabulous. It’s alright, but not fab. Final domestic demand (GDP excluding inventories and net exports) was trimmed to +1.9% a.r. from +2.0% but this also takes into account government cutbacks. Private final sales (GDP excluding inventories, net exports  and government) was unchanged at 2.6%, which is not fabulous but still decent.

Doug Short illustrates the difference between “fabulous” and “alright”. Quite a step down from a 3.3% cruising speed to 1.8%.


The only thing not revised up was consumer spending, 70% of the economy. There, the downshifts were from 5.5% in the late 1990’s to 3-4% in the mid-2000’s to the current 2% pace.


But that is in spite a real disposable income per capita no longer growing. How long can a 2% spending pace be sustained without income growth?



In the second half of 2012, consumer spending got support from a sharp drop in gas prices. Ain’t happening just yet.image

Could that help? Saudi Arabia Set to Pump 10.5M Barrels of Crude a Day

Saudi Arabia is set to pump 10.5 million barrels a day of crude in the third quarter, a million bpd increment over the second quarter and its highest quarterly level of production ever, leading U.S. energy consultancy PIRA said. (…)

“This is the tightest physical balance on the world oil market I’ve seen for a long time.” PIRA reported its estimate to clients earlier this week.

Libyan oil output has fallen from 1.4 million bpd to just 250,000 bpd after protesters shut oilfields. (…)

Ross said about 400,000 bpd of the incremental supply would go to feed domestic Saudi power usage during peak summer demand for air conditioning. (…)

U.S. Prepares for Solo Strike Against Syria

The Obama administration laid the groundwork for unilateral military action, a shift officials said reflected the U.K.’s abrupt decision not to participate and concerns Bashar al-Assad was using the delays to disperse military assets.

France ready for Syria strike without UK
Hollande to discuss next move with Obama


This morning:

Consumer Spending in U.S. Increase Less Than Forecast as Income Gains Slow

Consumer purchases, which account for about 70 percent of the economy, rose 0.1 percent after a revised 0.6 percent increase the prior month that was larger than previously estimated, the Commerce Department reported today in Washington.

Sad smile Adjusting consumer spending for inflation, purchases were unchanged in July compared with a 0.2 percent increase the previous month, according to today’s report.

The Commerce Department’s price index tied to spending, a gauge tracked by Federal Reserve policy makers, increased 1.4 percent in July from the same period in 2012. The core price measure, which excludes volatile food and energy categories, rose 1.2 percent from July 2012.


Bidding Wars Continue to Tumble as Housing Market Rebalances

Competition in the US residential real estate market dropped for the fourth consecutive month in July, underscoring the market’s overall trend towards balance. Nationally, the percentage of offers written by Redfin agents that faced multiple bids fell to 63.3 percent in July, down from 68.6 percent in June, and 75.7 percent at the peak in March.image

The slide in competition reflects multiple factors that are beginning to erode sellers’ market dominance across the nation:

Buyer Fatigue: First and foremost, Redfin agents report that buyers in the nation’s most competitive markets are growing weary. (…)

Budgets: The combined effect of rising prices and mortgage rates continues to price buyers out of the market, reducing competition for available inventory. Nationally, the median home price per square foot for single-family homes was up 18.7 percent in July from the year before and average weekly 30-year fixed mortgage rates in July were up about one percentage point from May. For a $250,000 mortgage, this jump in prices and mortgage rates translates to a rise in mortgage payments of more than $300 per month.image

Growing Inventory: Rising prices and mortgage rates are also driving homeowners to list their homes in greater numbers, which is boosting options for buyers. As of June, the number of single-family homes for sale in Redfin markets was up 7.8 percent from March and the national months of supply of inventory grew from 2.7 in May to 3 in June. Some homeowners who were underwater on their mortgages are becoming more confident that their homes can fetch a fair price and are deciding to list. Furthermore, our agents in San Francisco and Chicago report that mortgage rates are also leading homeowners to list. Homeowners, too, want to capitalize on historically low rates and move up before rates increase further. (…)

Further Cooling on Tap for Autumn: Looking forward, we expect that bidding wars will continue to cool slightly during the autumn months. The real estate market was atypically hot during autumn of 2012 because buyers were rushing to lock in low mortgage rates once home prices stabilized. Now that rates are higher, home prices continue to rise, and more inventory is coming available, buyers are likely to battle for homes less often.(…)



Euro-Zone Adds 15,000 Jobs

The number of people unemployed in the euro zone fell in July for the second month in a row, adding to tentative signs that a modest recovery under way in the currency bloc’s economy is starting to erode its sky-high levels of joblessness.

Eurostat said the annual rate of consumer-price inflation fell to 1.3% in August from 1.6% in July, putting it considerably below the central bank’s target area of a little below 2%.

Sad smile  German Retail Sales Unexpectedly Drop in Sign of Uneven Recovery

German retail sales unexpectedly fell for a second month in July, signaling an uneven recovery in Europe’s largest economy.

Sales adjusted for inflation and seasonal swings dropped 1.4 percent from June, when they declined 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted an increase of 0.6 percent, according to the median of 27 estimates in a Bloomberg News survey. Sales climbed 2.3 percent from a year earlier.

These are big drops!

Fingers crossed Eurozone sales rise marginally in August

Retail sales in the eurozone rose for the first time in nearly two years in August, Markit’s retail PMI® data showed. The value of retail sales increased since July, albeit only marginally. Employment at retailers also rose slightly following a 16-month sequence of decline. National differences in sales trends remained, however, as Germany registered further strong growth, France achieved a back-to-back modest rise and Italy posted an ongoing sharp decline.


Germany’s retail sector continued to drive the overall increase in eurozone retail sales. Sales rose on a monthly basis for the fourth successive survey, the longest sequence of growth in 17 months.
Moreover, the rate of expansion was little-changed from July’s two-and-a-half year high.

Retail sales in France rose for the second month running in August, and at the strongest rate since October 2011. Prior to July, sales had fallen for a survey-record 15-month period.

Italy remained the weak link in the eurozone retail recovery mid-way through Q3. Sales fell for the thirtieth successive month, and the rate of
contraction remained sharp despite easing since July.


Retail sales in the eurozone continued to decline on an annual basis. That said, the rate of contraction eased to the slowest since October 2011. A further sign of the nascent recovery in the eurozone retail sector was a rise in employment in August. This mainly reflected recruitment at German retailers, while retail employment in France stabilised following a prolonged period of cuts and Italian retailers shed staff at the slowest rate since August 2010.

Pointing up imageAverage purchase prices paid by retailers for new goods rose at a sharper rate in August. By product sector, food & drink again posted the steepest rate of inflation, followed by clothing & footwear. Among the three national retail sectors covered, Germany posted the steepest increase in average input costs. Meanwhile, gross margins across the eurozone retail sector declined at the slowest rate since April 2011.

Note that the retail PMI is barely above 50 and has shown a very high volatility in recent years. The German engine remains fairly sound but the Italian and French engines remain unreliable. See below on France.

DOUCE FRANCE from BloomberBriefs:

President Francois Hollande’s pension reforms will probably fail to eliminate the pension deficit or make the French economy more
competitive. France’s government spends the most in the euro area relative to its GDP and has the third-highest labor costs.

People under the age of 40 will have to work beyond 62 to earn a full
pension. Contributions by both workers and employers will increase by
0.3 percentage point in 2017, though the government will cut other payroll charges in an effort to contain labor costs. The pension system is still likely to have a deficit of 13.6 billion euros in 2020, instead of 20.7 billion euros, even if all the announced measures are adopted, according to the French pension council.

The proportion of population over the age of 65 is forecast to climb to 18
percent next year from 17.1 percent in 2012. France has the third-highest
share of labor costs allocated to employers’ social contributions, according to Eurostat, at 34.2 percent, compared with 21 percent in Spain. The nation is ranked the 21st most competitive economy in the world, compared with sixth for Germany, according to the Global Competitiveness Index.


The government may be forced to introduce additional spending cuts and
tax increases to meet its commitment to balance the budget by 2017. It is
likely to miss the target of narrowing the deficit to 3.7 percent of GDP this
year from 4.5 percent, having abandoned the original target of 3 percent.
France has failed to balance its budget since 1974, and the shortfall has
averaged 3.9 percent of GDP over the last decade.


The government claims two-thirds of its austerity measures will come
from changes to the tax system this year, with 20 billion euros in tax
increases planned, compared with 10 billion euros in spending cuts. Taxes
accounted for 45.9 percent of GDP in 2011, compared with a euro-area
average of 40.8 percent. Public spending in France amounts to 57 percent
of GDP, the highest level in the euro region.


U.S. equity markets have done well recently against flattening earnings, stable inflation rates and higher interest rates. Rising investors confidence has translated into absolute P/E ratios that are 10% above their historical mean and Rule of 20 readings that are unfavourable from a risk/reward ratio standpoint.

Earnings expectations for Q3 and Q4 look increasingly vulnerable. Can confidence stay high enough to offset “natural”, more dependable forces?

Ben Hunt’s latest note is highly relevant here:

(…) The shift in perceptions of Fed competence is being driven by opinion leaders’ public statements questioning the Fed’s communication policy. Here’s the critical point from an Epsilon Theory perspective: these public statements are not questioning the content of Fed communications; they are questioning the USE of communications as a policy instrument in and of itself. In exactly the same way that a magician immediately becomes much less impressive once you know how he does his trick, so is the Fed much less impressive once you start focusing on HOW policy is being communicated rather than WHAT policy is being implemented.

For example, this past Saturday Jean-Pierre Landau, a former Deputy Governor of the Bank of France and currently in residence at Princeton’s Woodrow Wilson School, presented a paper at Jackson Hole focused on the systemic risks of the massive liquidity sloshing around courtesy of the world’s central banks. For the most part it’s a typical academic paper in the European mold, finding a solution to systemic risks in even greater supra-national government controls over capital flows, leverage, and risk taking.  But here’s the interesting point:

Pointing upZero interest rates make risk taking cheap; forward guidance makes it free, by eliminating all roll over risk on short term funding positions. … Forward guidance brings the cost of leverage to zero, and creates strong incentives to increase and overextend exposures. This makes financial intermediaries very sensitive to “news”, whatever they are.”

Landau is saying that the very act of forward guidance, while well-intentioned, is counter-productive if your goal is long-term systemic stability. There is an inevitable shock when that forward guidance shifts, and that shock is magnified because you’ve trained the market to rely so heavily on forward guidance, both in its risk-taking behavior (more leverage) and its reaction behavior (more sensitivity to “news”). This argument was picked up by the WSJ (“Did Fed’s Forward Guidance Backfire?”) over the weekend, and it continues to get a lot of play. It’s an argument I’ve made extensively in Epsilon Theory, particularly in “2 Fast 2 Furious.”

Landau’s paper is probably the most public example of this meta-critique of the Fed, but I don’t think it’s been the most powerful. Highly influential opinion leaders such as David Zervos and John Mauldin have recently written in their inimitable styles about the Fed’s use of words and speeches as an attempt at misdirection, as an ultimately misguided effort to hide or sugarcoat actual policy. FOMC members themselves are starting to question the Fed’s reliance on communications as a policy instrument, as evidenced by the minutes released last week. Combine all this with the growing media focus on the “battle” between Yellen and Summers for the Fed Chair – a focus which will create policy disagreements between the candidates in the public’s perception even if no such disagreements exist in reality – and you have a recipe for accelerating weakness in perception of Fed competence.

The shift in perception of non-Fed central bank competence, especially of Emerging Market central banks, is even more pronounced. Actually, “competence” is the wrong word to use here. The growing Narrative is that Emerging Market central banks are powerless, not incompetent. The academic foundation here was made in a paper by Helene Rey of the London Business School, also presented at Jackson Hole, where the nutshell argument is that global financial cycles are creatures of Fed policy … period, end of story. Not only is every other country just along for the ride, but Emerging Markets are kidding themselves if they think that their plight matters one whit to the US and the Fed.

Just as malcontents with the exercise of Fed communication policy may be found within the FOMC itself, you don’t have to look any further than Emerging Market central bankers and finance ministers themselves for outspoken statements protesting their own impotence. Agustin Carstens, Mexico’s equivalent to Ben Bernanke, gave a speech on the “massive carry trade strategies” caused by ZIRP and pleaded for more Fed sensitivity to their capital flow risks. Interesting how the Fed is to blame now that the cash is flowing out, but it was Mexico’s wonderful growth profile to credit when the cash was flowing in. South Africa’s finance minister, Pravin Gordhan, gave an interview to the FT from Jackson Hole where he bemoaned the “inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment” now that the Fed is talking about a Taper. Christine Lagarde got into the act, of course, calling on the world to build “further lines of defense” even as she noted that the IMF would (gulp!) have to stand in the breach as the Fed left the field. To paraphrase Job: the Fed gave, and the Fed hath taken away; blessed be the name of the Fed.

I’ll have a LOT more to say about all this in the weeks and months to come, but I thought it would be useful to highlight these shifts in Narrative structure in real-time as I am seeing them. Informational inflection points in the market’s most powerful Narratives are happening right now, and this is what will drive markets for the foreseeable future.

Right on cue:

India’s Central Bank Governor Concedes to Missteps

It is rare for officials to admit that their policies have been less than perfect, but India’s central bank governor Duvvuri Subbarao did just that late Thursday, in his last public speech as head of the Reserve Bank of India.

Mr. Subbarao, whose five-year term as RBI governor ends Sept. 4, said the bank could have done a better job of explaining the intentions behind the various steps it has taken in the last three months to support India’s declining currency.

“There has been criticism that the Reserve Bank’s policy measures have been confusing and betray a lack of resolve to curb exchange-rate volatility,” Mr. Subbarao said at a lecture in Mumbai. He said that the RBI is unequivocally committed to curbing volatility in the rupee. “I admit that we could have communicated the rationale of our measures more effectively,” he added.

Ghost Über-bear Albert Edwards will scare you even more, courtesy of ZeroHedge:

(…) The fabulously entertaining Zero Hedge website keeps running the charts showing that the evolution of bond yields and equity markets this year resembles closely what happened in 1987 (see below). Now we should all take these comparisons with a pinch of salt, but what if…

I remember the 1987 crash well. I was working at Bank America Investment Management as an economist/strategist at the time. Of course, the immediate trigger for the equity crash was the fear of US recession caused by the fear that the US would have to hike rates sharply to defend the dollar. Those fears were triggered by Germany raising rates at a time when the G6 had recently agreed to stabilise the US dollar at the February 1987 Louvre Accord, after two years of sanctioned dollar weakness. Investors got into a tizzy about recession, jumping many steps ahead of the game. But, in the wake of a run-up in US bond yields that year, equities were richly priced and so very vulnerable to recession fears, however unfounded. And then the machines took over. That couldn’t possibly happen again, or could it?

Therein lies one of the key lessons I learnt in my 30 years in the markets. Pointing up It is not just to try to predict what will happen, but to second-guess what the markets fear might happen. Indeed a recession did not ensue and the 1987 crash turned into a tremendous buying opportunity.

Edwards then links with the EM debacle:

But another shoe will surely drop soon. China has gone off the radar in the last month, as the data have firmed, but it is set to return centre stage. Our China economist Wei Yao, thinks “this sudden turn-around is similar to that during Q4 2012, when the multi-quarter deceleration trend reversed shortly after the policy stance shifted to “cautious” easing. But that growth pick-up did not last for more than one quarter.” A continued slowdown in credit growth will strangle the current buoyancy of house price inflation (see charts below), with property sales growth having already peaked. Wei expects the Chinese data to relapse in Q4.

“Many people are writing about a Chinese credit crunch and banking crisis. I disagree. The authorities will have a choice as to whether to accept such a crunch or devalue and launch a new credit cycle to keep the balls in the air once again. Devaluation is the preferred option…..So the (recent) spike in SHIBOR was not a tremor indicating the earthquake of a banking crisis, but a tremor of a forthcoming RMB devaluation.” That will be the biggest domino of all to fall. And, as with the 1987 crash, markets will react to the fear of the devaluation and the deflation it will bring to the west, rather than the event itself. (…)

The emerging markets “story” has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000. Ghost

Indian Growth Slows to Four-Year Low as Rupee Drop Dims Outlook

Gross domestic product rose 4.4 percent in the three months through June from a year earlier, compared with 4.8 percent in the prior quarter, the Statistics Ministry said in New Delhi today. The median of 44 estimates in a Bloomberg News survey was for a 4.7 percent gain.

Emerging Markets Raise Rates

Indonesia raised its benchmark rate by half a percentage point on Thursday, one day after a half-point increase by Brazil and a week after a rate increase by Turkey. Other developing economies are under mounting pressure to tighten credit to support their weakening currencies. Brazil’s central bank hinted at further increases to come.


(…) The value of India’s rupee has fallen by a fifth against the U.S. dollar since the beginning of May. The Reserve Bank of India’s initial response was to stop easing monetary policy, holding benchmark interest rates steady in June and July. When the rupee kept falling, the RBI limited the amount of money banks could borrow from it.

Investors saw that as effectively raising interest rates, at a time when India’s economy was growing at its slowest pace in a decade. Bonds and stocks sold off after the RBI’s steps. Yields on both short- and long-term rupee bonds jumped.

Some analysts say the incoming Indian central-bank governor may have no choice but to raise interest rates sharply, much as Fed Chairman Paul Volcker did in the U.S. in the 1980s.

South Africa is in a similar bind. Authorities want to halt declines in its currency, which has lost nearly a quarter of its value against the dollar over the past year but are reluctant to smother already weak growth.

Inflation reached an annual rate of 6.3% in July, but when South African central-bank officials meet to discuss rates again next month, they will be loath to raise rates in an economy struggling to meet forecasts for 2% growth this year, analysts say.

Some investors worry that they could see a repeat of the Asian financial crisis of 1997-98, or the stampede out of emerging-market currencies a decade later in 2008. But there are reasons to believe it won’t be that bad.

Pointing up Most emerging-market currencies today are allowed to float, so central-bank officials don’t have to defend a fixed exchange rate as they did during the Asian crisis. The government debt levels of countries like Indonesia, India and Brazil aren’t particularly high and are denominated mainly in local currency.

Not just in the U.S.: Elections Complicate Economic Decisions for India,Indonesia Upcoming elections in India and Indonesia, two of the countries hardest hit by the selloff in emerging-market assets, are making it more difficult to make the tough decisions both countries need.

Pointing up  Ft Alphaville has a great post on the EM situation:

From a recent Citi presentation, a chart stressing the potential risk of negative-feedback loops in the options available to those emerging market countries now trying to stem capital outflows and defend their currencies:

The chart makes an important point and is self-explanatory, but it isn’t comprehensive.

Notably excluded is the imposition of capital controls on outflows, which thus far have been mostly resisted with the exception of some limited measures in India. (…)

Also unmentioned is the option to lobby the central banks of developed countries, encouraging them not to tighten policy too quickly. This option appears to have been pursued with some vigour at Jackson Hole last weekend, but probably won’t carry much weight at the next FOMC meeting.

So the immediate options, at least those of a sweeping nature, are unattractive. And the possibility that emerging market central banks and governments will overreact and excessively tighten policy is a singular concern. (…)

But the broader issue is that it remains quite difficult to gauge the severity of the year’s EM currency and asset selloff — and to know whether it is more attributable to an acute market crisis versus a more fundamental economic shift.

Among the various possible causes normally cited are the Fed’s talk of tapering; the unwinding of carry trades; Chinese rebalancing; the pass-through effects of this rebalancing on commodity-exporters (Australia, South Africa, various countries in South America); the end of the commodity super-cycle generally; the limits to growth in countries that procrastinated on necessary structural changes; continued sluggishness by developed-country consumers; and dwindling investor patience with widening current account and budget deficits.

The causes aren’t mutually exclusive, of course, and some influence the others in various ways.

It’s also tough to know, at least for the inexpert or non-obsessive follower of international economics, how prepared the affected countries are to handle it.

The current situation — has it reached the level of “crisis” yet? — inevitably will have a similar feel to the crises of the 1990s given the reversal of hot money flows, the threat from speculators attacking various currencies, and even the involvement of some of the same countries. But so much is different, and most of the differences are positive.

As our colleagues David Pilling and Josh Noble wrote in Wednesday’s FT:

Back then, many countries had fixed exchange rates and their companies were heavily exposed to foreign debt. As currencies came under pressure, central banks desperately spent reserves to defend them. When the peg finally broke, currencies collapsed and companies’ foreign-denominated debts soared.

Thailand, Indonesia and South Korea had to seek help from the International Monetary Fund. Partly as a result of now largely discredited IMF austerity packages, they subsequently plunged into deep recession. Indonesia, the worst affected, lost 13.5 per cent of GDP in a single year. Suharto, the dictator, was toppled.

Today the picture is very different. Asian economies have flexible exchange rates, much higher reserves and sounder banking systems. India, for example, has reserves to cover seven months of imports compared with only about three weeks when it had its own “come-to-IMF” moment in 1991.

Nor, this time around, has India’s central bank wasted much firepower on defending the currency. Instead, it has largely allowed the rupee to slide. A weaker currency should boost exports and slow imports, closing the current account deficit automatically.

And so it might, hopefully without much lasting damage. We would also note the still-favourable growth differentials between developed and emerging market countries, which didn’t exist in the 1990s.

Admittedly this doesn’t preclude a new crisis or crises of a different flavour, and do read the full FT piece for the thoughts of more-pessimistic commentators, with careful attention to the points of Ruchir Sharma. Still, for the moment the problems seem at least endurable, if not actively manageable.

And although these countries’ immediate choices are regrettably limited, there is also a more hopeful longer-term story that can be told about this year’s events.

It’s mainly about how (some of) the lessons of the 1990s and the recent developed-world financial crisis have been heeded. In addition to the ability of emerging market currencies to respond to market forces, the relevant Asian countries also better understand the need for multi-lateral coordination and support during crises.

Furthermore, as economists from Standard Chartered explained, it’s likely that investors have become more discerning about the details of countries’ external funding problems. The economists looked at the short-term external debt situations for India, Indonesia, and Thailand — the three countries involved running a current account deficit — and found that “in all three cases the vast majority of the debt due within one year does not come with serious financing risk”.

More broadly, we’ve been especially interested in tracking the continued expansion of local-currency debt and capital markets, where tremendous progress has been made in the last decade and a half, especially in sovereign and corporate bond markets.

They’re important for a few reasons.

Companies in emerging markets find it easier to borrow in their own currencies, and are better able to hedge their debt if they rely on imports denominated in foreign currencies. Currency swings therefore become less threatening. (…)

Emerging market governments with sophisticated capital markets also have less need to build up massive stores of foreign currency reserves, a process that exacerbated the unnatural problem of global imbalances in the decade prior to the crisis of 2008 — when too much capital flowed from developing countries to developed countries rather than the other way round.

And of course, robust local-currency debt and equity markets, when accompanied by sound governance practices, reduce the dependence on foreign bank lenders and lead to a more diversified base of stakeholders. (…)

International trade and capital flows collapsed after the financial crisis of 2008. Within Europe the balkanisation of financial markets has mostly remained in place. But as both Citi’s presentation and a helpful McKinsey report explain in detail, by 2012 capital inflows to emerging markets had returned nearly to their pre-crisis levels.

These inflows returned, however, mainly in the form of foreign direct investment and investments via capital markets rather than bank lending.

Foreign direct investment is already considered to be a more stable kind of inflow. And the progress in developing local-currency capital markets also indicates that the growth in portfolio flows will be less worrying in the future, if certainly not yet.

These were favourable trends. Despite the present slowdown, in time they are likely to resume course given the disproportionately shallower financial markets in developing countries.

Investors in local-currency emerging market debt have been shellacked this year, and clearly the FX markets are spooked. Maybe the selloff will accelerate and new balance of payments crises really are imminent. We don’t know: much depends on policy still being decided, especially given the recent introduction of heightened geopolitical risks. We certainly don’t mean to dismiss the possibility of a terrible outcome, especially for an individual country.

Fingers crossed For now, however, the problems appear both different in nature and smaller in scale, and unlikely to spread uncontrollably. If we’re right about that, then a plausible explanation is that the lessons of the 1990s haven’t gone entirely ignored. And if a number of emerging market countries are about to enter a grinding period of slower growth and structural adjustments, or to experience new financial strains, at least they do so better prepared. (…)

Japan inflation highest in five years
Weaker yen pushes up cost of fuel and electricity

Consumer price inflation in Japan rose to an annual rate of 0.7 per cent in July, its highest level in almost five years, as the effects of a weaker yen pushed up the cost of fuel and electricity.

Excluding fresh food, the all-items index rose by 0.7 per cent from a year earlier and by 0.1 per cent from June.

But excluding the cost of energy from the calculation brings the yearly CPI to minus 0.1 per cent. The prices of items such as housing, furniture, medical care and culture and recreation all fell from a year earlier, while charges for fuel, light and water rose by 6.4 per cent.

Other data released on Friday morning were positive. The jobless rate dropped to 3.8 per cent, from 3.9 per cent in June, while industrial production rose by 1.6 per cent on a yearly basis and 3.2 per cent on the previous month.

Household spending edged up 0.1 per cent from a year earlier, from a 0.4 per cent fall in June.

Signs of Japanese Investment Uptick Investment by Japanese companies has been a laggard in the nation’s economic recovery. But things could be turning, data showed Friday.

Industrial production jumped 3.2% on month in July, reversing a 3.1% downturn in June.

The government was keen to point out that much of the production seems to show companies are spending more on increasing production.

The output of capital goods, which includes machinery, was at its highest level on a seasonally-adjusted basis since May 2012, a Japanese official said. The official also pointed toward big jumps in the output of goods such as steam turbines and equipment used in the plastics industry – tentative signs that companies are investing in increasing capacity. (…)

Other data today added to a sense that companies’ optimism is returning. Japan’s Purchasing Managers’ Index rebounded to 52.2 in August from 50.7 in July. That’s not far off a high of 52.3 in June. New orders, a sign of renewed corporate activity, were strong.

Have a good one!


NEW$ & VIEW$ (1 JULY 2013)

Manufacturing Slows Across Asia

Economies across Asia, including China, showed slowing growth or contraction in manufacturing activity, signaling the region isn’t yet feeling the benefits of renewed strength in the West

(…) In South Korea, manufacturing contracted for the first time in five months in June and exports fell for the first time since February—though an even larger fall in imports kept Seoul’s trade balance in surplus.

HSBC’s PMI for Indonesia fell to its lowest level in four months, while a gauge for Taiwan showed manufacturing contracting for the second straight month. Vietnam’s June PMI fell sharply to hit its third-lowest reading ever.

Only India and Australia bucked the trend, but with caveats: HSBC’s PMI for India rose to 50.3 from 50.1—far below readings last year that were regularly in the mid- to upper-50’s. An Australian manufacturing gauge showed improvement but remained in contractionary territory, according to data from the Australian Industry Group. (…)

(China PMI is covered separately)

China’s Cash Crunch Eases

Interbank interest rates eased in China Monday, but they are expected to stay high until later this month as Beijing tightens its grip over risky lending.

Euro-Zone Jobless Rate Hits High

The European Union’s official statistics agency Monday that the proportion of the workforce without jobs rose to 12.1% in May from 12.0% in April to reach its highest level since records began in 1995. In the U.S., the unemployment rate stood at 7.6%.

As of May, 19.2 million people were without jobs in the euro zone, up 67,000 from April and 1.344 million from May 2012. The unemployment rate among people aged 24 or under was much higher, although it fell to 23.8% from 23.9% in April.


French Car Market Shrinks Again

France’s car market shrank sharply again in June, bringing the decline in registrations of new cars to 11% for the first half of the year, with the country’s auto makers’ association warning of only a slight improvement by the end of the year.

The Comité des Constructeurs Français d’Automobiles said the French car market will likely contract 8% this year, to its lowest level since 1997, compared with an earlier forecast of a decline of roughly half that for 2013.

Euro area annual inflation up to 1.6%

Euro area annual inflation is expected to be 1.6% in June 2013, up from 1.4% in May, according to a flash estimate from Eurostat, the statistical office of the European Union.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in June (3.2%, stable compared with May), followed by energy (1.6% compared with -0.2% in May), services (1.4% compared with 1.5% in May) and non-energy industrial goods (0.7% compared with 0.8% in May).


BOJ Beat: Five Takeaways From Tankan Survey  The Bank of Japan’s closely-watched tankan survey of corporate sentiment showed that the mood among businesses improved sharply in the three months to June after the central bank introduced an aggressive easing policy in April.

Wary Investors Turn to Cash

Recent market turmoil is pushing more investors into cash. Bond and stock mutual and exchange-traded funds saw outflows of $19.96 billion in the week ended Wednesday.

That’s the biggest outflow since August 2011, as the euro-zone debt crisis was intensifying and worries about the U.S. debt ceiling were coming to a head.

Some of the money went into money-market funds, which took in $5 billion during the week, according to Lipper. It’s likely that billions more flowed into cash or directly into short-term debt, said Matthew Lemieux, a senior research analyst at Lipper. The WSJ Dollar Index rose 1.6% in the period.

The latest fund-flow data captures the tail end of what’s been the biggest quarterly selloff in U.S. Treasurys since the fourth quarter of 2010. Ten-year Treasury yields have surged from a 2013 low of about 1.6% on May 1 to a peak of 2.667%, the highest since August 2011. (…)

Over the last four weeks, about $11.4 billion have come out of high-yield corporate bond funds that report weekly. That’s the largest of any four-week period tracked by Lipper.

Investment-grade corporate bond funds saw $2.32 billion exit in the last week, the second-largest outflow on record. (…)

Number of the Week: U.S. Oil Boom Affecting Global Prices The U.S. oil boom is finally affecting global energy prices — but don’t expect cheap prices at the pump as a result.

The U.S. pumped 6.5 million barrels a day of oil last year, according to the Energy Information Administration, the most since the mid-1990s, and production has continued to surge; April’s figure of 7.4 million barrels per day marked the best month in more than two decades. (Other sources suggest an even bigger increase.) (…)

The industry wasn’t expecting the huge surge in production from North Dakota, so companies didn’t have the pipelines in place to handle all the new oil. So rather than flow into the global market, much of the oil stayed in the middle of the U.S. That pushed down the price of West Texas Intermediate (WTI), the benchmark price for mid-continent oil, but had a much smaller effect on Brent crude, the benchmark price for most oil outside North America. In late 2012 and early 2013, WTI traded for more than $20 a barrel less than Brent.

Unfortunately for American drivers, a large percentage of U.S. gasoline is refined from oil priced off of Brent, not WTI. As a result, even as American crude oil prices remained moderate, prices at the pump stayed high.

Now, however, the gap between WTI and Brent is starting to narrow, as a new report from the Energy Information Administration makes clear. The industry has expanded pipeline capacity and found other ways, such as rail cars, to get oil from the middle of the country to major demand centers on the coasts. Meanwhile, coastal refineries are shifting to use more domestic crudes, leading to lower demand for Brent. The result: The gap between the two prices has narrowed to under $10 per barrel. (…)


While I was away salmon fishing, U.S. equities rose 2.2%, feeding on Fed officials’ generally more dovish comments and mixed economic news, all suggesting that the fed would continue to supply the financial heroin investors now believe they desperately need.

Here’s the week’s recap:

Orders excluding aircraft & parts, a measure of “core” business investment, gained 1.1% (3.2% y/y), the third consecutive month of a similar increase.


New home sales increased 2.1% (29.0% y/y) last month to 476,000 (AR) from a revised 466,000 during April, initially reported as 454,000. (…)

Pointing up  Note that the recent strength is primarily in the Midwest. Sales of new houses in the three other regions, including the important South and West regions (78% of all new home sales in the last 3 years) were essentially unchanged since March:


Similar trends are seen in pending home sales which are +1.1% YoY in the West, the weakest of all regions, while PHS are strongest (+22.2% YoY) in the Midwest.

Home price strength is building throughout the country. The seasonally adjusted Case-Shiller 20 City Home Price Index rose 1.7% (12.0% y/y) during April following its upwardly revised 1.9% March jump, earlier reported as 1.1%. The 3-month annualized rate of increase of 21.5% was a record for the series which dates back to 2000. Home prices in the narrower 10 city group rose 1.8% in April (11.6% y/y). 

Home prices have risen in each metropolitan area with the strongest gains in San Francisco, Las Vegas, Phoenix, Atlanta, Detroit, Los Angeles and Minneapolis. Lagging the rest of the country have been home price gains in New York, Cleveland, Washington D.C., Dallas, Boston and Chicago.

Confused smile  Detroit?  image

The Mortgage Bankers Association reported that total applications for a home mortgage fell 3.0% w/w, extending the declines of the prior six weeks. The latest level was down by one-third since early-May. Last week’s decline reflected a 5.2% drop (-38.4% y/y) in applications to refinance an existing loan. Refinancings were down 41.8% since early May. Home purchase mortgage applications increased 2.1% last week (15.9% y/y), up 26.7% since year end.

Here’s a close up of purchase apps courtesy of BofA Merrill Lynch:


Real GDP growth for Q1’13 was revised lower to 1.8% (1.6% y/y) from last month’s estimated 2.4% rise. Expectations were for a 2.4% gain. Growth in consumer spending and business investment were significantly reduced, but residential investment growth was raised.

Personal income regained its footing in May with a 0.5% gain; April’s move, originally reported as down very marginally, was revised to a 0.1% rise. Year-on-year, income was up 3.3%, compared to the 2.8% reported last month for April. 

Wages and salaries were up 0.3% in May (3.7% y/y), following 0.1% in April, which was originally reported as flat. The stronger income total came from gains in dividend income, 1.6% on the month (8.0% y/y), interest income, 1.9% m/m (2.3% y/y) and transfer payments, which rebounded by 0.8% m/m (3.4% y/y) after April’s 0.6% decline. (…)

Personal consumption expenditures also regained their footing in May, increasing 0.3% (2.9% y/y) after April’s 0.3% fall, a revision from 0.2% reported a month ago. The result was in line with the Consensus forecast of 0.3%. Durable goods outlays picked up by 0.9% (6.7% y/y), after two monthly decreases; motor vehicle purchases in particular were up 1.0% after edging lower for three months.(…)

Pointing up  Note that while disposable income was up 0.6% during April-May and +0.8% (+3.2% a.r.) during the last 3 months,  personal expenditures were unchanged in April-May and up only 0.2% (+0.8% a.r.) during the last 3 months.


The personal saving rate rose to 3.2% in May, and April’s figure was revised to 3.0% from 2.5% in the initial report. It was 3.9% in May 2012.

The PCE chain price index increased 0.1% in May (1.0% y/y) after April’s 0.3% decline. Energy goods and services prices rose 0.2% after their drop in April of 4.5%; Gasoline prices continued lower modestly, but other energy costs rose markedly, especially natural gas for household utilities, which was up 2.4% (16.6% y/y). Elsewhere, durable goods prices were down 0.1% (-1.9% y/y) while apparel prices rose 0.2% (unchanged y/y). Food prices decreased 0.2% (+1.0% y/y) while services prices also were up 0.2% (1.8% y/y), including the natural gas item. The overall price index excluding food & energy was up 0.1% (1.0% y/y).

Adjusted for price changes, disposable income gained 0.4% in May (1.1% y/y) while real spending rose 0.2% (1.8% y/y).

  • Eurozone Retail PMI Rises 2.3 To 49.1

The eurozone retail sector continued to record falling sales in June, Markit’s retail PMI® data showed. That said, the month-on-month drop in sales revenues was the slowest since March 2012, having eased for the third month in a row. Sales continued to fall sharply on an annual basis, however, and employment in the sector was cut for the fifteenth month in succession.


Germany’s retail sector continued to recover in June, registering a second straight month of rising sales and the fastest rate of growth since February 2012. Prior to May, retail turnover had declined four times in five months.

Meanwhile the eurozone’s second-largest economy, France, posted a decline in sales for the fifteenth month in a row in June. The rate of decline slowed sharply, however, to the weakest for a year. Italy’s retailers continued to experience a steep downturn in sales, and the rate
of decline reaccelerated in June having been the slowest in eight months in May.


Retail employment in the eurozone declined for the fifteenth month running in June. The rate of job shedding was modest, and broadly in line with the trend over the current sequence. Germany continued to register growth in retail workforces, as has been the case since June 2010.


Demand for industrial commodities continue to dwindle.

Consider the chart below of the S&P GSCI Industrial Metals Index:

This index tracks the price of industrial metals like copper, zinc, aluminum, nickel, and lead. The S&P GSCI Industrial Metals Index continuously declining suggests these metals aren’t being used as much—factories are not operating at their full potential in the global economy. (Michael Lombardi at Profit Confidential)

The Chicago Fed National Diffusion Index is once again hitting the –0.35 level. Thirty-three of the 85 individual indicators made positive contributions to the CFNAI in May, while 52 made negative contributions.


The Index itself is not at the ominous –0.70 level but nevertheless signals a weak economy and not one that is showing signs of improvement like the Fed is suggesting.


BTW, Fed misses are nothing new (chart from ISI)



ISI’s Company Survey Diffusion Index is rolling over. The consumer-related surveys were particularly weak last week, including the homebuilders which was the weakest.



The MNI China Business Survey fell to 53.7, from 56.7 in May. Both new orders and production are down and both current and future conditions are down. This confirms the HSBC survey for June.


Q2 earnings season officially begins July 8. Factset reports that a record high number and percentage of S&P 500 companies issued negative EPS guidance for Q2.

For Q2 2013, 87 companies have issued negative EPS guidance while 21 companies have issued positive EPS guidance. If 87 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 86, which was recorded in Q1 2013. If 21 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing negative EPS guidance for a quarter. The current record is 25, which was also recorded in Q1 2013.

These numbers are also well above the five-year averages for the number of companies issuing negative EPS guidance (66) and positive EPS guidance (40) for a quarter.


The percentage of companies issuing negative EPS guidance is 81% (87 out of 108). If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter. The current record is 77%, which was also recorded in Q1 2013.

On average, companies have issued EPS guidance that has been 18.0% below the mean EPS estimate. However, if Peabody Energy is excluded, the average difference between EPS guidance and the mean EPS estimate would be -6.2%. This number is below the 5-year average of -8.3%.

At the sector level, the Information Technology (+6) and Consumer Discretionary (+5) sectors have witnessed the largest increases in the number of companies issuing negative EPS guidance relative to their five-year averages. The Information Technology (-8) and Consumer Discretionary (-5) have also seen the largest decreases in the number of companies issuing positive EPS guidance for the quarter relative to their five-year averages.


High Percentage (80%) of Companies Issuing Negative Revenue Guidance

For Q2 2013, 55 companies have issued negative revenue guidance for the quarter and 14 have issued positive revenue guidance. As a result, 80% (55 out 69) of the companies that have issued revenue guidance for the quarter have issued negative guidance. If this is the final percentage for the quarter, it will mark the third highest percentage since 2006. The current record is 86%, which was recorded in Q4 2008. At the sector level, more than half (39) of the companies that have issued revenue guidance for the quarter are in the Information Technology sector. In this sector, 29 of the 39 companies (or 74%) that have issued revenue guidance have issued negative guidance.

Fiscal Year Guidance: Increase in Number of Companies Issuing Positive EPS Guidance since Q1

For the current fiscal year, 164 companies have issued negative EPS guidance and 88 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 65% (164 out of 252), which is below the percentage recorded at the end of March (69%).

Since March, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by four, while the number of companies issuing positive EPS guidance has increased by eleven. The Financials (+4), Consumer Discretionary (+3), and Health Care (+3) sectors saw the largest increases in the number of companies issuing positive EPS guidance for the current fiscal year since March 31.


For the current fiscal year, 92 companies have issued negative revenue guidance and 66 companies have issued positive revenue guidance. As a result, the overall percentage of companies issuing negative revenue guidance to date for the current fiscal year stands at 58% (92 out of 158), which is above the percentage recorded at the end of March (52%). Since March, the number of companies issuing negative revenue guidance for the current fiscal year has increased by seven, while the number of companies issuing positive EPS guidance has decreased by seven.

The Health Care sector saw the largest increase in the number of companies issuing negative revenue guidance (+7) and the largest decrease in the number of companies issuing positive revenue guidance (-6) for the current fiscal year since the end of March.

At the sector level today (with a minimum of 10 companies issuing guidance), the Consumer Discretionary (61%), Industrials (61%), and Health Care (60%) sectors have the highest percentages of companies issuing negative revenue preannouncements, while the Consumer Staples (57%) sectors has the highest percentage of companies issuing positive revenue preannouncements.

In summary

The estimated earnings growth rate for the S&P 500 overall for Q2 2013 is 0.8% this week, slightly below last week’s growth rate of 0.9%. On March 31, the Q2 earnings growth rate for the index was 4.2%. Eight of the ten sectors have witnessed a decline in earnings growth rates since that date, led by the Materials, Information Technology, and Industrials sectors. Only the Financials and Utilities sectors have seen increases in expected earnings growth rates since the start of the quarter.


Grant Williams “Call my bluff” piece on Fed “communications”, etc. This image gives you an idea:



NEW$ & VIEW$ (30 APRIL 2013)

Consumer Spending Rises 0.2%  Americans boosted spending in March, partly due to high heating bills, but slow income growth suggests consumers may have trouble propping up the economy in coming months.

Much of last month’s spending increase was due to colder-than-normal weather. Outlays for services jumped 0.7%, partly reflecting payments to utilities. Spending on goods fell. (…)

Personal incomes, meanwhile, were up only 0.2% last month. Savings as a percent of disposable income held steady at 2.7% in March.

The price index for personal consumption expenditures, the Fed’s preferred measure for inflation, was up only 1% year-over-year in March. The closely watched core PCE index, which excludes volatile food and energy prices, was up a modest 1.1% from a year earlier.

Here’s the run down from Haver’s table below:

  • Personal income declined 2.3% in Q1. Wages and salaries: +0.3%. DPI:-2.7%.



U.S. Pending Home Sales Reach a New High

According to the National Association of Realtors (NAR), pending sales of single-family homes during March rose 1.5% (7.0% y/y) after a 1.0% February decline, revised from -0.4%. The latest level was the highest since April 2010. The sales rebound in the aftermath of the removal in 2010 of the home buyers tax credit has raised home sales by more than one-third from the low.

Last month’s sales gain reflected mixed performance around the country. Sales in the South rose 2.7% (10.4% y/y) to a three-year high. The 1.5% rise in sales in the West, however, left them down 4.4% y/y. Sales have moved erratically sideways since early-2011. Sales in the Midwest nudged up 0.3% (13.7% y/y) to nearly the highest level of the economic expansion. In the Northeast, sales were unchanged m/m but were up a modest 6.3% versus March of last year.


Euro-Zone Jobless Rate Rises

The euro zone’s unemployment rate rose to a fresh high while the annual rate of inflation hit its lowest level since 2010, a combination that increases the chance of an ECB rate cut.

The European Union’s official statistics agency Tuesday said the rate of unemployment across the 17 countries that share the euro rose to 12.1% from 12.0%, the highest level since records began in 1995.


German Unemployment Climbs in Sign Economic Recovery Delayed

Figures released by German’s Labor Ministry showed the number of people without shops rose by 4,000 in April, having risen by 12,000 in March. However, the unemployment as calculated using Germany’s own methodology was unchanged at 6.9%, near its lowest level since reunification in 1990.

Eurostat also said the annual rate of inflation fell to 1.2% in April from 1.7% in March, to hit its lowest level in more than three years. Core is +1.0%.


Spanish Sovereign Spreads Drop Below 300 Basis Points

While the ratings agencies continue to lower their ratings and outlooks of European sovereign debt issuers, investors can’t seem to get enough of the paper.  Take the case of Spain.  Last summer, traders couldn’t dump the paper fast enough as spreads on 10-year Spanish sovereign debt widened out to more than 600 basis points (bps) above 10-year German Bunds.  Now less than a year later, spreads on that same Spanish debt have narrowed by more than 50% to 294 bps.  This represents the lowest level since December 2011. 

Ironically, the last time spreads on Spanish debt were this low was in late 2011 in the aftermath of the MF Global meltdown following its poorly timed bullish bets on European debt.  The only difference between then and now is that back then spreads were widening out from much lower levels, while today they have come down significantly from even higher levels.

Taiwan’s Economy Expanded Slower Than Estimated Last Quarter

Gross domestic product rose 1.54 percent in the three months through March from a year earlier, after increasing 3.72 percent in the fourth quarter, the statistics bureau said in a preliminary report in Taipei today.

Taiwan’s export orders and industrial output for March unexpectedly fell, while Japanese and South Korean production missed forecasts as faltering demand limits Asia’s recovery.

U.S.: Crude oil imports continue to plummet

Just-released data from the U.S. Energy information Administration (EIA) continue to show the formidable impact on global energy trade patterns caused by the surge in U.S. crude oil production. As today’s Hot Chart shows, U.S. volume imports of crude oil plummeted to their lowest level since 1996 in April. At this juncture most of the decline has been at the expense of OPEC. As shown, U.S. net volume imports from the oil cartel have dropped more than 40% since 2007.



NEW$ & VIEW$ (3 APRIL 2013)

U.S. new car sales strong but…Factory orders only so-so. Soft patch watch. Germany car sales down. Eurozone inflation down. China services solid. India to stimulate. Canadian housing and car sales weak. The Rule of 20 gets “support”.

Mar. ADP Jobs Report: +158K vs. +205K consensus, 198K prior.


U.S. New-Car Sales Climb Sharply

Overall, March adjusted annualized sales jumped 8% to a 15.3 million vehicle pace, compared with 14.1 million a year ago, according to market researcher Autodata Corp. The gains prompted automotive information website to lift its 2013 U.S. sales forecast to 15.5 million new cars and light trucks, from 15 million.


Before you celebrate:

Domestic Car Sales Decline For Third Month As Hurricane Sandy Replacement Cycle Fades

(…) One does, wonder, however, how much of a factor for this has been the forward demand-pull impact of Hurricane Sandy in late 2012, when as a result of tens of thousands of cars being totaled in tri-state area flooding, consumers scrambled to car lots to buy new autos. Well, we may have found the reason for the recent disappointing performance in both the Chicago PMI and the Manufacturing ISM – the positive effect from Sandy is finally fading, as today’s domestic car sales show, which posted a surprising decline in March, especially in non-Trucks which dipped to the lowest since October 2013, and the first miss in total light vehicle sales SAAR since October.

The chart below shows total domestic car and truck auto sales in the past year in the US.


And the steep decline in just car sales:

Furthermore, as Stone McCarty observes, the biggest hit to total auto sales was experienced by light cars, whose SAAR dipped to 5.354 million the lowest since October and well below expectations, with demand for greater fuel-consuming light trucks still going strong, and validating that the recent surge in end-demand has been primarily one of Sandy-driven replacement.

Once again, the mix of vehicle sales seems to be geared toward more light truck sales this month. The long-run trend indicates that demand for smaller, more fuel-efficient cars has increased relative to demand for light trucks because of rising gasoline prices. However, it appears that light truck sales have been boosted in the short-term since Superstorm Sandy. Perhaps the recovery process has sparked interest in vehicles with higher load capacity. Also, many truck enthusiasts will be satisfied simply in receiving the large fuel-economy benefits by replacing their older, less fuel-efficient vehicles

Factories Reflect Growth Uncertainty U.S. factory activity expanded in February, but orders for many products have swung between losses and gains from month to month, underscoring the uncertainty of the economic recovery.

Orders for manufactured goods increased by 3% to $491.98 billion, the Commerce Department said Tuesday. The report matched economists’ expectations and came after a revised decline of 1% in January.

The increase in orders was uneven and possibly boosted by a spike in military spending ahead of across-the-board spending cuts that started in March. A doubling of demand for civilian aircraft and a 73% jump in defense-related orders offset declines for chemicals, machinery and computers in February.

(…)  Outside of transportation products, factory orders were up just 0.3%.


Nomura’s Lewis Alexander (via Business Insider):

Our Q1 GDP estimate is currently tracking 3.3%, with an increase in final sales of 2.0%, and a contribution from inventory accumulation of 1.2 percentage points. Recent economic data, however, have suggested a slowdown in activity as we approach Q2. This lends support to our forecast that there will be a slowdown in growth in Q2 from slower government spending, delayed household adjustment to higher tax burdens, and a smaller increase in inventories. We estimate that US real GDP will grow at an annual rate of 1.4% in Q2, with an increase of 1.2% in final sales.

surprise index


German March Car Sales Drop 17% on Europe Economy Concern

First-quarter sales dropped 13 percent from a year earlier to about 674,000 vehicles. The decline was exacerbated by the Easter holiday shifting to March this year from April in 2012, the group said.

Car production at German plants was reduced by 13 percent to 474,900 vehicles in March, bringing the three-month volume decline to 11 percent, the VDA said.

Euro area annual inflation down to 1.7%

Euro area annual inflation is expected to be 1.7% in March 2013, down from 1.8% in February, according to a flash estimate from Eurostat.



China’s Service Industries Expanded at Faster Pace in March

The non-manufacturing Purchasing Managers’ Index rose to 55.6 from 54.5 in February, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement today. A separate services gauge from HSBC Holdings Plc and Markit Economics rose to 54.3, matching the highest since May, from 52.1.

The official report “reflects growing momentum” in expansion, Cai Jin, a vice chairman at the federation, said in a statement. A construction index rose to the highest in a year, while a logistics gauge “increased significantly,” Cai said.

India PM: Will Take Steps to Boost Economy

India’s economy is experiencing a temporary slowdown, and the general belief is that absence of swift “corrective” government action could leave growth languishing at around 5%, Prime Minister Manmohan Singh said Wednesday.

Toronto home sales drop 17 per cent

The numbers come one day after the local real estate board in Calgary, which was expected to be a hot spot in the country for housing sales this year, said sales fell by more than 2 per cent compared to last March.

Canadian auto sales fall third month in a row

Vehicle sales fell 1 per cent in Canada last month, the third straight monthly dip after hitting the second-highest level on record in 2012.


The highly reputable ISI Group is now including the “Rule of 20” as one of the valuation tools it follows. Here’s what they wrote recently:

If we don’t have another “Sell in May”, then toward the end of this summer, investors may want to assess a longer-term outlook, and a logical step may be to think about $120 earnings and an 18 P/E. The earnings number would be the next round figure for, say, 2015. The P/E assumes inflation stays around +2% and the “Rule of 20”, (…).

They included this table which, interestingly, shows that the average total of P/E+CPI since 1967 is a neat 20. However, I fail to see where they get their data. The S&P levels used in the table are inconsistent with the official monthly data. Same for the Operating EPS.image

In reality, the Rule of 20 does not pretend that the average P/E is 20, rather that “fair P/E” is 20 and that readings below 20 indicate an undervalued market and vice versa. For example, the S&P 500 spent 6 years substantially below “20” between 1982 and 1987 while the Index tripled.

Here’s the chart going back to 1956 (click to enlarge).



NEW$ & VIEW$ (19 MARCH 2013)


  • You can row back as hard as you like and try to spead the blame about but it’s a big stick to have handed out so casually or confusedly or unthinkingly or to keep Russia/ Russian business happy or to appease the German electorate… depending on how you want to judge it. (FT Alphaville’s David Keohane)
  • The Spaniards, Italians and Portuguese may not run to the banks today or tomorrow, but as soon as the crisis intensifies in a euro-zone country, the bank customers will remember Cyprus. They will withdraw their money and, by doing so, intensify the crisis. (German economist Peter Bofinger)

Cyprus Moves on Small Savers

Cyprus’s government is aiming to exempt smaller savers from a controversial bank deposit levy, according to draft legislation submitted to parliament.

Under the legislation, savers with less than €20,000 (about $26,000) in their bank accounts will pay no levy, while those between €20,000 and €100,000 will pay a 6.75% rate.

Bank accounts with more than €100,000 would be taxed at a 9.9% rate, the draft said.

But the FT writes that

There were also questions whether Cyprus could legally exempt any class of savers under the country’s tax treaties, senior officials said.

And that

Anton Siluanov, the Russian finance minister, said the decision to impose a levy had forced Moscow to reconsider easing terms of a €2.5bn loan to Cyprus that has kept the government afloat for the past two years. Brussels and Nicosia had been in talks with Moscow to extend the loan’s repayment schedule and lower its interest rate.

The big risk:

Cyprus Levy plan ‘bleak day for banking union’
Bailout plan blows hole in EU’s reform plans

The weekend decision to strip €5.8bn from the savings accounts of Cypriot banking customers has blown a hole in the EU’s ambitious reforms billed as the route out of the eurozone crisis, while potentially undermining a growing reliance at banks around the world on funding their operations with customer deposits.

“This is a totally crazy decision,” said one European bank chief. “This is the biggest policy mistake that the [European Central Bank] has subscribed to.” (…)

“We nailed our colours to the mast in Europe to say that [accounts] under €100,000 were protected,” said a senior official involved in financial reform. “Now there is a real risk of mixed messages.” (…)

“It is the abrogation of an explicit guarantee,” Tim Adams, managing director of the Institute of International Finance, the global banking lobby group, told the Financial Times. “This is an unsettling precedent. In future, I fear they will regret having done it.”

In a blunt note to clients on Monday, analysts at Morgan Stanley said the move “goes beyond expectations, raising concerns of a possible policy mistake”. (…)

Paul Donovan, senior economist at UBS, said in a podcast: “While Cyprus might be characterised as a special case, there have been so many special cases across the euro that political reassurances in this regard will not have much worth. Why would one risk holding a bank deposit in a banking system, even with insurance and guarantees, if one thinks the banking system is vulnerable?”

Positive spin?

Is Bitter Medicine for Cyprus a Cure for the Euro Zone?


(…) The deal marks a victory for the German approach to tackling the euro crisis. By breaking the final taboo and inflicting losses on depositors—even those with less than €100,000 who believed they were protected by a state guarantee—the euro zone has sent a powerful signal.

The message is that the burden of tackling unsustainable debts will fall on a country’s own creditors rather than be passed on to other members.

Of course, that is tough on those who must bear the losses. But the euro zone’s previous approach of trying to shield creditors from losses via endless bailouts was making the region’s debt problems worse. Meanwhile, the austerity needed to service those debts was crushing any hopes of a recovery. (…)

The risk is that the threat of private-sector debt restructurings will lead to contagion in the form of bank runs and the loss of market access for weak sovereigns and banks. But these risks may be overstated.

After all, the European Central Bank is now a credible backstop to solvent governments and sovereigns. Any contagion to insolvent borrowers should accelerate the process of debt restructurings, so that they are swiftly restored to a sustainable footing.(…)


Weekly chain store sales rose again (+1.4%) last week, the fifth consecutive weekly gain. The strong 2012 base keeps the Y/Y advance low, however.




Big Week for Housing Data  The National Association of Home Builders’ index, a measure of confidence, slips this month to 44 from 46 in February, as current sales index fell four points. But the details were more encouraging.

The report said the problem isn’t demand but the lack of buildable land, “along with rising costs for building materials and labor.”

Two charts FYI:


(CalculatedRisk)image(RBC Capital)

Homeowners Dig Out

Rising home values have lifted more borrowers out of the hole of owing more than their properties are worth, an encouraging sign for an economy still closely tied to the health of the housing market.

The number of “underwater” homeowners in the fourth quarter of 2012 declined by 1.7 million from a year earlier, meaning 1.7 million U.S. households have regained home equity, according to data released Tuesday by CoreLogic, a research company. Overall, the company said 21.5% of households with a mortgage were underwater at the end of 2012, down from 25.2% at the end of 2011.


India cuts interest rate to revive growth  Central bank lowers repo rate to 7.5%

Pointing up  U.K. Inflation Quickens to Fastest in Nine Months  U.K. inflation accelerated to the fastest pace in nine months in February and factory-gate prices increased twice as much as forecast as energy costs surged.

Consumer prices rose 2.8 percent from a year earlier, compared with 2.7 percent in January, the Office for National Statistics said in London today. Producer prices increased 0.8 percent in February from the previous month, the most since April 2011.

Higher energy bills and a weaker pound have fueled price pressures in recent months. (…)

Separate data today showed pipeline price pressures may be building in the economy. Input prices surged 3.2 percent in February from January, the most since March 2011. The increase was led by a 7.1 percent surge in crude-oil costs. From a year earlier, input prices were up 2.5 percent.



Stock Bulls Get a New Member

Morgan Stanley’s Adam Parker, who has been among the gloomiest of the major brokerage house stock strategists, planted his flag in the bullish camp.

Mr. Parker unveiled a year-end target of 1600 for the Standard & Poor’s 500-stock index, which would mean a 3.1% gain in the benchmark Sarcastic smile from Monday’s close of 1552.10 and a 12% advance for the S&P for the year. Behind the more upbeat forecasts, Mr. Parker said, are expectations among Morgan Stanley’s economists that the U.S. economy will pick up steam in the second half even as the Federal Reserve continues its easy money policies.

Mr. Parker’s sunnier outlook joined more optimistic forecasts also released Monday by Deutsche Bank’s David Bianco and Goldman Sachs Group Inc.’s David Kostin, both of whom lifted their S&P 500 price targets for the year. Another former bear, Meredith Whitney, founder and chief executive of Meredith Whitney Advisory Group, also has changed her tune on U.S. stocks.

“I have not been this constructive, this bullish on the U.S., on equities in my career,” she said in an interview on CNBC on Monday. Party smile(…)

“Given our economics team’s view of improving U.S. growth and ample liquidity still being provided by the Fed, it is hard to see what causes a major market correction,” Mr. Parker wrote in his “Spring Cleaning” note.

But in an interview, Mr. Parker said his call comes with some reservations. “We’ve been saying for some time that the market’s ahead of itself by any historical measure,” he said. (…) Confused smile

At Deutsche Bank, Mr. Bianco now expects the S&P 500 to hit 1625 this year, up from an earlier forecast of 1600. That would take the S&P up 14% for 2013. Mr. Kostin also raised his S&P 500 target to 1625, but from a previous goal of 1575. Both are now among the most bullish of the major bank strategists, who expect, on average, a rise to 1558 by the end of 2013, according to Birinyi Associates.

“We expect the S&P 500 to…boldly go where it has never gone before,” Mr. Bianco wrote in a note to clients. Messrs. Kostin and Bianco are expecting gains to be led by stronger earnings.

Mr. Kostin lifted his 2013 earnings forecast for the companies in the S&P 500 to $108 a share from $107.

He pointed to better-than-expected economic reports as providing a lift to earnings but added profit margins “will remain static.”

He tempered his bullish call, however, saying U.S. stocks “currently trade near fair value based on various metrics.” Confused smile

Goldman Sachs Upgrades Economic Forecast  Citing “solid” reports on employment, manufacturing and retail sales, Goldman Sachs says the U.S. has shown notable resilience amid higher taxes.

The company nudged up its near-term growth forecasts, seeing 2.9% this quarter and 2% next.


NEW$ & VIEW$ (18 MARCH 2013)

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

CYPRUS!!  Whatever It Takes?

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

Europe botches another rescue

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

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

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

Europe is risking a bank run

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

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

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

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

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

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

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

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


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

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

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


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


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


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


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


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

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




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

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

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

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

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

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

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

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

EMU Inflation Steadies

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

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

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

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

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

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

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



Markit looks at the rolling three month data:

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

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

Sun  And, considering the consumer sector, rightly concludes that

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

China Housing Prices Rise

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

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

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

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

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


Slip in Home Sales Clouds Canada Forecast

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

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

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

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

Ghost  RBC Capital Markets summarizes Canada’s housing market:

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


Flaherty to cut spending in response to weak growth forecast

Meanwhile, in the U.S.:

2013 Economic Report of the President (456 pages)


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

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

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

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

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

Clock  EUROPE: Shortermism Is Back

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

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

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

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

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

S&P warns of socially explosive situation in euro zone

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


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



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

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



  • Snap! There Goes Dow’s Streak 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A technical foul!!!!!!!

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

Yeah, sure!

Remember Martha?

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

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

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

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

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


NEW$ & VIEW$ (15 FEBRUARY 2013)

Jobless claims. Farm jobs. Housing inventory. Eurozone trade. Sentiment: don’t get too sentimental. M & A activity.

Open-mouthed smile  U.S. Jobless Claims Fall Sharply

The number of U.S. workers filing new applications for unemployment benefits fell by 27,000 last week to a seasonally adjusted 341,000, the latest sign of an improving labor market.

The four-week moving average of claims, which smooths out week-to-week volatility, advanced by 1,500 to 352,500. Despite the slight rise last week, the average level remained near a five-year low.

The number of new claims has fallen in four of the past five weeks. The downward trend points to slow but steady job growth. Hiring typically picks up when layoffs decline. (Chart below from Bespoke Investment)


Smile  Farm Boom Sows Jobs Bounty

With U.S. farm incomes hitting record levels in recent years as global grain prices have climbed, farmers have more money to spend on corn seed, harvesting combines, fertilizer and other products, fueling growth for the agribusiness industry.



Housing Inventory, Already Low, Dropped Further in January

The number of homes listed for sale, which stood at an 11-year low at the end of last year, fell even further in January, according to a report released Thursday.

There were just 1.48 million homes listed for sale at the end of January, down by 5.6% from December and by 16.5% from one year ago, according to data compiled by That’s the lowest level since the firm began its count in 2007. The National Association of Realtors separately reported last month that inventory ended 2012 at an 11-year low.

Pointing up  And spring is just about there! (Do Home Prices Risk Overheating Due To Low Supplies?)

Nice set of charts from ZeroHedge which also carries excerpts from a Goldman Sachs interview with Bob Shiller:

Lightning  Europe’s Woes Deepen

Losing Ground

Lightning  Euro-Zone Exports, Imports Weaken

Eurostat, the European Union’s official statistics agency, said exports of goods from the 17 nations that use the euro fell 1.8% in December from November, after growth of 0.6% the previous month.

Eurostat’s figures on Friday also showed imports of goods to the euro zone fell 3.0% in December, illustrating the fragile state of domestic demand in the currency bloc.

Spanish Core Inflation Up Even as Recession Deepens

Core inflation, which excludes energy and fresh food prices, accelerated to 2.2 percent in January, the National Statistics Institute in Madrid said today. Underlying prices fell 1.6 percent from the previous month. (…)

Spain’s headline inflation rate, based on European Union calculations, was 2.8 percent, matching an estimate published on Jan. 31. Stripping out taxes, inflation was 0.7 percent in January, according to the Spanish statistics institute, and 0.2 percent if fresh food and energy were also excluded, according to the Spanish measure.


A flurry of acquisitions announced within hours of each other Thursday suggests big-time deal-making is back after a nearly six-year absence from Wall Street.

The $40 billion-worth of deals struck Thursday brings the total value of M&A transactions announced since January to nearly $160 billion, the fastest start to a year since 2005, according to Dealogic. M&A volumes historically follow the lead of the stock market, and the 6.67% increase in the Standard & Poor’s 500 Index this year suggests more are on the way. (…)

In addition to the Heinz deal, the highlights of Thursday’s bonanza were the $11 billion merger between AMR Corp. and US Airways Group; a reworked deal for beer giant Anheuser-Busch InBev NV over the divestment of some brands to rival Constellation Brands Inc. worth $4.75 billion; and drug wholesaler Cardinal Health Inc.’s $2 billion purchase of rival AssuraMed.

M&A bankers are renowned for their optimism, no matter the conditions. But Mr. Lee and others argue that the recent spate of large deals, which also include the $16 billion merger of cable companies Liberty Global Inc. and Virgin Media Inc., and the $18.1 billion to be spent by Comcast Corp. to buy General Electric Corp. out of broadcaster NBC Universal, are more than coincidental timing.

Their argument is this: Companies have largely exhausted the benefits of cutting costs and improving productivity since the recession. They are now looking elsewhere for the level of growth that keeps shareholders happy. Deals, economic theory goes, are one way. (…)

Hmmm…That last paragraph doesn’t sound bullish, does it? This next one is interesting, however:

Pointing up One thing that has changed is an alignment of both credit and stock markets. In 2013, both are rallying at the same time, offering cheap credit to buyers and the prospect of acceptable prices to sellers. (…)

The number of deals is back to its previous peaks, but not their values.

  • An increase in M&A should not come as a great surprise. Data over the past 50 years shows that M&A activity is strongly positively correlated with inflation-adjusted stock prices and the value of M&A is linked to nominal stock prices.
  • While deal values are not showing nearly as strongly recently as deal volumes, today’s announced activity could be a game changer in this story. (RBC Capital)


Thumbs up  Funds keep flowing into equities

Research firm Lipper Inc. reported $34.2 billion in net deposits into stock mutual funds and ETFs over the four weeks ended Jan. 30, the largest four-week total since January 1996. Several other industry researchers also reported high levels of cash flowing into stocks as the market climbed to five-year highs.

January marked the first time in 11 months that deposits into domestic equity funds exceeded withdrawals. (…)

The American Association of Individual Investors, for example, notes that bullish sentiment – the expectation that stock prices will rise over the next six months – is above its historical average, as it has been for nearly three months now. (WSJ) (Chart below from Bespoke Investment)

High five  On that last sentiment indicator, you might want to read an old post of mine: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!

Feeling groovy?

The same WSJ article adds this scary view:

Doug Kass of Seabreeze Partners Management told CNBC he’s getting “the Summer of 1987 feeling,” about U.S. equities.

I was there managing money in 1987 and I am not getting that “1987 feeling”. For the record and for sake of objectivity:

  • Earnings troughed in Dec. 85, rose marginally in 1986 and accelerated throughout 1987.
  • Inflation troughed at +1.1% in Dec. 86 and rose sharply to an Oct. 1987 peak of +4.5%.
  • 10y Treasury yields troughed at 7.1% in Jan. 1987 and rose rapidly to 9.5% in Oct. 1987.
  • Trailing P/Es were 14.8x in Dec. 1986 and rose to 18.8x in Aug. 1987.
  • The Rule of 20 barometer moved rapidly from deep undervaluation (-22% in Dec. 1986) to near extreme overvaluation (+20% in Aug. 1987).



Don’t get me wrong. I am not saying this market is riskless (see WINDLESS EQUITIES, STAY CURRENT! if you have been away). Just that this is no 1987 even though currency wars were also present then.

Disappointed smile  Nasdaq Weighs Earlier Wake Up

Nasdaq said it plans soon to start processing trades at 4 a.m., a challenge to NYSE Euronext.