NEW$ & VIEW$ (18 DECEMBER 2013)

Low Inflation Tests World’s Central Banks Inflation is slowing across the developed world despite ultralow interest rates and unprecedented money-printing campaigns, posing a dilemma for the Fed and other major central banks as they plot their next policy moves.

U.S. consumer prices rose just 1.2% in November from a year earlier, according to Labor Department data released Tuesday.

Meanwhile, annual inflation in the euro zone was 0.9% in November, the European Union’s statistics office said Tuesday. And central banks in Sweden and Hungary cut interest rates, the latest efforts elsewhere in Europe to boost struggling economies as inflation remains low. (…)

Central bankers worry about inflation falling too low because it raises the risk of deflation, or generally falling prices, a phenomenon that is difficult to combat through monetary policy. Some economists believe weak or falling prices can lead consumers to delay major purchases, exacerbating an economic slowdown. Even without deflation, very low inflation can be a sign of weak demand that weighs on wages, corporate profits and growth.

Low Inflation Tests World Central Banks

BEWARE COMPLACENCY ON U.S. INFLATION

The CPI less food and energy, also called core inflation, increased 0.2% (1.9% annualized rate) on a seasonally adjusted basis, after 3 months of consecutive 0.1% montlhy gains.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in November. Median prices have been rising by 0.2% in 7 of the past 8 months,

Over the last 12 months, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%

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Mug Is The Fed Driving You To Drink? 

Correlations!

LET’S HOPE HE’S RIGHT:

Gasoline prices will reach $3.15 by the end of the year, according to Andy
Lipow, president of Lipow Oil Associates LLC. “We’re going to see significant increases in gasoline inventories the next few weeks,” he said. “Refiners will maintain their high rates of utilization while demand declines toward its seasonal low in January and February.”

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Although low oil prices don’t necessarily mean low inflation anymore (chart from BMO Capital):

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Nerd smile MORE ON INFLATION COMPLACENCY

U.S. Productivity Slows, Labor Costs Rise

Revised Q3 data show labor productivity among nonfarm firms rose 3.0% annualized in the quarter and unit labor costs fell 1.5%. But the quarterly data mask a clear slowing trend in productivity this year (0.3% y/y) and a pickup in unit labor costs (2.1%). The former hints at further strength in employment, as the low-hanging productivity fruit of recent years is largely picked. But, it also implies higher unit labor costs and somewhat firmer inflation in 2014. (BMO Capital)

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The deceleration to zero productivity growth, which has a direct link to profit margins, will finally incentivize the business sector to invest organically in their own operations with belated positive implications for capex growth. (David Rosenberg)

Keep in mind that the current low labour participation rate technically means that the supply of labour is tight. And this:

On December 4th Barack Obama called for a higher federal minimum wage. He has previously suggested that it rise from $7.25 to $10.10.

Even though

In 1979 7.9% of workers toiled at or below the federal minimum wage; last year 2.8% did. From January 1st 21 states will have a minimum wage higher than the federal one. More may introduce one next year; others will raise theirs further. (The Economist)

Add that:

Mortgages To Get Pricier Next Year

Consumers can expect to pay more to get a mortgage next year, the result of changes meant to reduce the role that Fannie Mae and Freddie Mac play in the market.

The mortgage giants said late Monday that, at the direction of their regulator, they will charge higher fees on loans to borrowers who don’t make large down payments or don’t have high credit scores—a group that represents a large share of home buyers. Such fees are typically passed along to borrowers, resulting in higher mortgage rates. (…)

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don’t have down payments of at least 20% and who have credit scores of 680 to 760.

A borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 and making a 10% down payment, for instance, would pay fees totaling 2% of the loan amount, up from 0.75% now. The 2% upfront fee could raise the mortgage rate by around 0.4 percentage points.

Borrowers with larger down payments could also be affected. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%. (…)

The changes follow other announcements in recent weeks that could raise loan costs for some borrowers. The Federal Housing Administration, a government agency that guarantees loans with down payments as small as 3.5%, said earlier this month that it would drop the maximum loan limit in around 650 counties. In San Bernardino, Calif., for example, the loan limit will fall to $335,350 next month from the current level of $500,000.

Separately, the FHFA said Monday it would study reducing the loan amounts that Fannie and Freddie guarantee by around 4%, bringing the national limit to $400,000 from its current level of $417,000. Those changes won’t take effect before October 2014, the agency said.

 U.S. mortgage applications fall in latest week: MBA

Applications for home mortgages fell last week, dropping to a multi-year low, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.5 percent to 374.6 in the week ended December 13.

The index has fallen for six of the past seven weeks. Mike Fratantoni, MBA’s vice president of research and economics, said the index dropped to its lowest “in more than a dozen years… as interest rates increased going into today’s Federal Open Market Committee meeting.”

The MBA’s seasonally adjusted index of refinancing applications fell 4.3 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, lost 6.1 percent. (Chart from CalculatedRisk)

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 Japanese Exports Rise

The volume of merchandise exports in November—seen as a more reliable gauge of underlying strength than value terms—rose 6.1% from a year earlier, the Ministry of Finance announced Wednesday. The increase was the sharpest in a year and a half, and compares with a 4.4% rise in October.

Exports to Asia rose 5.9% in volume terms, the most in more than two and a half years, offsetting a slowdown to the U.S. and Europe.

Japanese manufacturers exported a total 512,432 automobiles in November, up 9.4% from a year earlier, the fastest rise in about a year and a half. They also shipped 67,000 motorcycles, up 7.0%, faster than the previous month’s 4.5% rise.

CHINA ECONOMY NOT ABOUT TO ACCELERATE

From CEBM Research:

The adjusted new orders manufacturing PMI between 2011 and 2013 have been significantly lower than in 2010 and remained range-bound. No sign of a breakthrough has yet been observed.

Consumption is a relatively positive component in 1Q14, as consumption
experienced a significant decrease due to the anti-corruption movement in 2013. However, based on our survey, general consumption, including
department stores, retail and restaurants, are not very strong, as the CEBM Consumption Index has hit a 6-year low. Therefore, an upside trend in consumption in 1Q14 is limited.

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The volume of transactions in Canton Fair leads exports by 6 months.
Transaction volume Y/Y at this autumn’s Canton Fair is lower than the Fair this spring. Given this correlation, exports in 1H14 are not likely to
accelerate.

Another indicator for weakening exports is US GDP. Except 1H13, when the abnormally high growth of exports may have been due to false foreign trade to take advantage of interest rate arbitrage, US GDP Y/Y and China’s exports Y/Y are correlated. Because US GDP Y/Y is likely to be lower in the first half of 2014 and higher in the second half, Chinese exports are unlikely to accelerate in 1H14.

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From National Bank Financial:

Year-on-year export growth has stabilized at around 8% overall, or
roughly 5% excluding exports to Hong Kong. And with the yuan now at an all-time high in real effective terms according to latest data from the Bank of International Settlements, it will be a tall order for exporters to increase growth over the coming years.

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CHINA’S DOMESTIC ECONOMY HAS ITS OWN HEADWINDS

Samsung Shifts Plants From China to Protect Margins

Samsung Electronics Co. (005930) built the world’s largest smartphone business by tapping China’s cheap and abundant workforce. Not for much longer: it’s shifting output to Vietnam to secure even lower wages and defend profit margins as growth in sales of high-end handsets slows.

By the time a new $2 billion plant reaches full production in 2015, China’s communist neighbor will be making more than 40 percent of the phones that generate the majority of Samsung’s operating profit. The Suwon, South Korea-based company’s second handset factory in Vietnam is due to begin operations in February, according to a Nov. 22 statement on the local government’s website. (…)

“The trend of companies shifting to Vietnam from China will likely accelerate for at least two to three years, largely because of China’s higher labor costs,” said Lee Jung Soon, who leads a business-incubation team of the Korea Trade-Investment Promotion Agency in Ho Chi Minh City. “Vietnam is really aggressive in fostering industries now.” (…)

Intel, the world’s largest chipmaker, opened a $1 billion assembly and testing plant in Ho Chi Minh City in 2010. Nokia said its facility near Hanoi producing Asha smartphones and feature handsets became fully operational in the third quarter. LG Electronics Inc. (066570), Samsung’s smaller South Korean rival, is building a new 400,000 square meter complex to make TVs and appliances as part of a $1.5 billion investment plan. (via Grant Williams)

China November Homes Prices Rise as Shenzhen Posts Record Gain

Shenzhen and Guangzhou posted increases of 21 percent from a year earlier, while prices climbed 18 percent in Shanghai and 16 percent in Beijing, data from the National Bureau of Statistics showed today. Prices rose from a year earlier in 69 of 70 cities tracked by the government last month, it showed.

The value of November home sales climbed to the highest in almost two years, to 720.4 billion yuan($119 billion), the statistics bureau said last week.

 

NEW$ & VIEW$ (17 DECEMBER 2013)

Industrial Output Hits a Milestone

Industrial production, which measures the output of U.S. manufacturers, utilities and mines, surged a seasonally adjusted 1.1% from the prior month, the Federal Reserve said Monday. That was the biggest jump in a year.

The ascent in part reflects big gains for volatile mining and utilities components, though underlying figures point to steadily rising demand for an array of industrial goods.

Manufacturing, the largest component of industrial production, remains below its prerecession peak. But the sector expanded 0.6% in November, the fourth straight month of gains. Overall factory output is up 2.9% from a year earlier.

Rising auto output led the increase, with motor-vehicle assemblies at the highest level in eight years. (Chart from Haver Analytics)

Strong report overall, indicating a rising momentum in most sectors. Capacity utilization keeps rising, a positive for profit margins.

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Here’s the LT Cap. Ute. chart from CalculatedRisk:

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Meanwhile, other costs are rising faster (Charts from Haver Analytics):

But not in manufacturing:

Auto  European Car Sales Rise for Third Month of Increased Demand

European new-car sales rose a third consecutive month in November, the longest period of gains in four years, as demand for autos from Volkswagen AG and Renault SA contributed to signs that an industrywide decline is ending.

Registrations in November increased 0.9 percent from a year earlier to 975,281 vehicles, the Brussels-based European Automobile Manufacturers Association, or ACEA, said today in a statement. The growth followed gains of 4.6 percent in October and 5.5 percent in September.

Among Europe’s five biggest car markets, demand increased 15 percent last month in Spain, which ranks fifth in the region, and 7 percent in the U.K., which places second. The Spanish government revived a cash-for-clunkers incentive program in October to boost car sales. Registrations dropped in Germany, France and Italy.

Asian, German Car Makers Seen Boosting Capacity in North America

Asian auto makers are expected to add the capability to build nearly one million more vehicles in North America over the next six years, and German auto makers could boost capacity by 700,000 in a challenge to the market stability that has helped boost profits for Detroit’s three big auto makers.

The new plants are aimed at supplying a projected growth in demand in the North American market, and could be used to ramp up exports, particularly to Europe and the Middle East and Africa, according to a new report by IHS Automotive—a division of business information firm IHS Inc.

Mike Jackson, a production forecaster with IHS Automotive, said that despite the two-million-unit increase forecast, overcapacity shouldn’t be a serious concern.

“We still anticipate a 90% to 95% utilization rate,” he said.

Mr. Jackson estimates that by 2020, two million vehicles will be exported from North America, a 60% increase over today. By then, 35% of exports will be going to Europe, 25% to South America and 22% to the Middle East and Africa, which is forecast to have strong growth. (…)

Global Car Sales Seen Rising to 85 Million in 2014

The global auto industry is expected to produce 85 million sales in 2014, up from an estimated 82 million this year, IHS Automotive said in a forecast Monday.

By 2018 sales are forecast to break 100 million, according to the unit of business-information provider IHS Inc.

This global growth is driven by rising wealth in emerging markets as well as relatively moderate gasoline prices. (…)

The U.S. market may rise 2.4% to 16.03 million from 15.65 million this year and to peak in 2017 at nearly 17 million before leveling off. (…)

Production in North America also is forecast to rise by 2.1 million vehicles between now and 2020, driven by new plants in the U.S. and Mexico. Asian auto makers are expected to add more than one million units of that capacity.

In a separate report, Deutsche Bank estimates global automobile sales will rise 4% in 2014, to 87.4 million light vehicles. That would be slightly ahead of the 3.5% growth the industry is on track to hit for this year, when global auto sales are expected to total 84 million vehicles. Total auto sales estimates can vary because of inconsistencies in reporting by different countries and whether heavier duty vehicles are included in the total.

The key drivers will be a return to growth in Europe and continued strong demand in the U.S. and China.

After six years of declines in new-car sales, Europe should see a rise of 3% in 2014, to about 14 million light vehicles, according to Deutsche Bank’s forecast. While that total would be an improvement from 2013, it would still be well below the 18 million new cars and light commercial vehicles that were sold in 2007. The bank says an aging fleet of cars on European roads, and a shortage of used cars, will prod more buyers to showrooms next year. (…)

The U.S. should also get a lift as consumers who signed three-year leases on new cars in 2011 look to trade in for new vehicles. Leasing plunged between 2008 and 2010, and the rebound in leasing since them should provide a steady stream of ready customers for 2014, 2015 and 2016, Deutsche Bank wrote.

The Chinese market for cars should grow 10% next year, to 23.8 million cars and light trucks. That is still a robust rate but down from the 13% increase the market will see for 2013. For this year auto sales are seen reaching 21.7 million vehicles.

Euro-Zone Prices Fall

Despite the decline in euro-zone prices during November, the European Union’s statistics agency said the annual rate of inflation rose to 0.9% from 0.7%, in line with its preliminary estimate. But even after that pickup, the rate of inflation was well below the European Central Bank’s target of just below 2.0%, and slowing labor costs suggest a significant increase is unlikely in the months to come.

According to Eurostat’s figures, energy prices fell by 0.8% during November, and were down 1.1% from the same month of 2012. But services prices also fell during the month, while prices of manufactured goods and food rose slightly.

Pointing up In a separate release, Eurostat said total labor costs in the three months to September were 1.0% higher than in the same period of 2012, while wages were 1.3% higher. In both cases, the rate of increase was the smallest since the third quarter of 2010. (…)

Wages fell in Ireland, Portugal, Cyprus and Slovenia, and were flat in Spain. That indicates that some rebalancing of the euro zone’s economy is under way.

But that relabancing would be aided by a more rapid rise in wages in stronger economies such as Germany. While the rate of wage growth there was higher than in the euro zone as a whole, it slowed significantly from the second quarter, to 1.7% from 2.2%.

OIL

US oil production to test record high
Shale boom sends output soaring

(…) The EIA said on Monday that it had revised sharply higher its estimates of future US crude output to about 9.5m barrels a day in 2016. That is very close to the previous peak in US production of 9.6m b/d in 1970 and almost double its low point of 5m b/d in 2008. (…)

A year ago, the EIA was predicting US crude production of about 7.5m b/d in the second half of this decade, a level that has already been surpassed this year. It has now revised sharply higher its estimates of future output in its central “reference case”, which assumes that current laws and regulations remain generally unchanged. (…)

The EIA now predicts that US crude output will begin to tail off slowly after 2020, but says there is still great uncertainty over the outlook. Adam Sieminski, the administrator of the EIA, said factors influencing the outlook for production would include future discoveries about the geology of US shale oilfields, regulatory requirements imposed on producers and investment in new pipelines.

Sustaining the surge in US oil production will require prices that are high by the standards of a decade ago. Mr Sieminski said US shale production would be profitable at prices above $90 a barrel, and possible at above $80-$85 a barrel. (…)

For natural gas, meanwhile, the EIA is predicting continued indefinite growth in production. Gas is easier to produce than oil from shale and other “tight” rocks, and by 2040 the EIA expects US production to be 56 per cent higher than in 2012. (…)

Oil Supply Surge Brings Calls to Ease U.S. Export Ban

The U.S. is meeting 86 percent of its own energy needs, the most since 1986, Energy Department data show.

A surplus of crude could overwhelm Gulf Coast and Canadian refineries that weren’t built for the type of oil now in abundance from new fields in North Dakota and Texas, forcing the issue, McKenna said.

U.S. refineries invested more than $100 billion in the past two decades on upgrades to handle heavy crudes from Mexico, Venezuela and the Middle East, according to Michael Wojciechowski, a Houston-based refining analyst at Wood Mackenzie, an industry research and consulting company.

“We’re going to have two choices, really — export production or shut-in production,” McKenna said. “That’s an ugly choice.”

Or build new refineries.

Once refined, oil may be exported as fuels, which aren’t restricted. The U.S. became a net exporter of petroleum products in June 2011 and shipped a record 3.37 million barrels a day for three weeks in October, Energy Department data show.

Profit Growth Outpaces Dividends at S&P 500 Firms

(…) Members of the S&P 500 index paid out just 33% of their reported earnings per share in the form of dividends during the third quarter. That’s down from the quarterly average of almost 45% since 1988 and an average of nearly 52% since 1936, according to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. (…)

Companies also are expected to pay out about 33% of profit in the fourth quarter, Mr. Silverblatt says, as profit growth outpaces dividend increases. (…)

Airplane  Boeing boosts dividend and buybacks
Jet maker voices confidence as it returns cash to shareholders

Boeing intends to increase its dividend by 50 per cent and ask investors to approve up to $10bn of share buybacks, the commercial jet maker said on Monday, calling the move a mark of confidence in its own future.

The quarterly dividend would increase from 48.5 cents to 73 cents, Boeing said. The new $10bn buyback programme would allow repurchases to continue once the company has exhausted the remaining $800m of an outstanding buyback authorisation granted in 2007.

Easy Money Delays Retail Shakeout

Investors are eagerly lending to risky retail borrowers like RadioShack, Sears Holdings and J.C. Penney, buying the chains time to try to turn around their businesses but delaying the overbuilt industry’s day of reckoning.

Thumbs down Loehmann’s Files for Bankruptcy

The discount retailer files for bankruptcy Sunday under the weight of more than $100 million of debt. The company employs 1,600 people at some 39 stores.

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NEW$ & VIEW$ (16 DECEMBER 2013)

U.S. Producer Prices Fall 0.1%

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

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

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

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

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

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

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

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

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

Canadian Housing: The Bubble Debate

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

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

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

EARNINGS WATCH 

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

ER_1209

The chart deserves some explanations, however:

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

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

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

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

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

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

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

THE CHRISTMAS RALLY

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

Is Santa Coming This Year?

Wait, wait!

Bespoke Investment suggests the market is oversold:

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

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

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

The Santa Claus Rally Season Is About To Begin (crossingwallstreet.com/)

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

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

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

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

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

This is the simplified chart from RBC Capital Markets

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Here is Doug Short’s:

WANT MORE?

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

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

 
SENTIMENT WATCH
 

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

Hunger Grows for U.S. Corporate Bonds

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

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

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

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

Meanwhile:

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

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

BARRON’S COVER

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

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

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

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

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

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

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

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

How to be right, whatever happens;

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

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

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

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

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

Light bulb  Hence the new marketing stance:

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

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

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

 

NEW$ & VIEW$ (28 NOVEMBER 2013)

Chicago PMI Stronger Than Expected

Following last month’s surge, economists were expecting some giveback in this month’s Chicago PMI report, and that is exactly what we saw today.  While economists were expecting to 60.0 from last month’s reading of 65.9, the actual decline was considerably less as the headline reading came in at 63.0.  (…)

Pointing up Beware! Inventories jumped.

German Unemployment Rises Fourth Month in Uneven Recovery

The number of people out of work climbed a seasonally-adjusted 10,000 to 2.985 million, after gaining by a revised 3,000 in October, the Nuremberg-based Federal Labor Agency said today. Economists predicted no change, according to the median of 33 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.9 percent.

Spain Household Spending Snaps Declines Amid Recovery

Spanish household spending grew in the three months through September for the first time in six quarters, helping end a two-year recession amid continued export growth.

Household spending increased 0.4 percent from the three months through June, when it declined 0.1 percent, while exports rose 2.2 percent after a 6.4 percent gain in the previous quarter, the Madrid-based National Statistics Institute said today.

Gross domestic product rose 0.1 percent in the third quarter, the office said, confirming an Oct. 30 estimate. The economy contracted 1.1 percent from a year earlier. (…)

ECB warns of risks posed by Fed tapering

The European Central Bank on Wednesday issued a stark warning over the threat posed by the scaling back of US monetary stimulus, calling on eurozone policy makers to do more to prepare for the market shocks from Federal Reserve “tapering”.

In its latest financial stability report, the ECB said the risks to the eurozone’s financial system from outside the currency bloc had grown since May due to the Fed’s talk of scaling back its $85bn of monthly bond purchases – despite a general improvement in market conditions.

“Starting in May, there was a significant repricing in global bond markets, which took place largely because of changing monetary policy expectations in the United States – with increased foreign exchange market volatility and stress borne largely by emerging market economies,” the ECB said. (…)

The ECB said the eurozone’s institutional investors were more exposed to bond markets than the region’s banks, but that it was difficult to know where the risks of ultimate losses were greatest.

“It cannot be ruled out that ultimate exposures are concentrated among a limited number of entities which may now be more vulnerable to any further severe market shock,” the ECB said.

It added that the recent turbulence meant that policy makers needed to ensure banks, insurers and pension funds could cope with a “normalisation” of yields from their current historically low levels. (…)

The ECB said weak bank profitability and persistent financial fragmentation still presented a threat to stability. Banking union would be “an important contribution” to resolving these hurdles. (…)

Unforeseen bank recapitalisations also posed a threat. “Although provisioning is increasing, it has barely kept pace with the deterioration in asset quality, on average, highlighting a potential further need for additional reserves to strengthen bank balance sheet resilience in case asset quality deteriorates further.” (…)

Euro-Zone Private-Sector Lending Declines

Private-sector lending fell by 2.1% in October from the previous year, the ECB said Thursday, following a 2% drop in September. A broad measure of money supply slowed sharply to just 1.4% year-over-year growth, suggesting inflationary pressures remain absent in the euro bloc.

Loans to firms declined by €12 billion ($16.3 billion) on the month in adjusted terms in October, after a decline of €10 billion in the previous month. Loans to households rose by €1 billion on the month after an increase of €6 billion in the previous month.

Eurozone Inflation Rises

Annual inflation in Spain rose to 0.3% in November from no change the previous month. Belgium’s rate also increased slightly. Data from German states suggest that annual consumer-price growth in Europe’s largest economy increased to 1.5% this month from 1.2% in October, according to BNP Paribas.

As a result, economists say annual euro-zone inflation likely increased slightly in November from October’s four-year low reading of 0.7%—a figure that prompted the ECB to reduce its key lending rate earlier this month to 0.25%. The ECB targets annual inflation of just below 2% over the medium term.

Canada Emerging From Biggest Slowdown Since Recession

The Bank of Canada estimates that over the past two years the economy’s output gap — a measure of unused capacity — has grown from about zero to 1.5 percent of gross domestic product, and that gap won’t close for another two years because of weak global demand for the nation’s exports.

“We’re slowly crawling our way out,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit. “I would still venture to say we’re vulnerable to a host of downside surprises.”

GDP probably grew at an annualized pace of 2.5 percent in the three months ended September, the biggest gain since the third quarter of 2011, according to the median estimate of 18 economists surveyed by Bloomberg. That’s up from 1.7 percent growth in the second quarter, when the economy was hurt by flooding in Alberta and a construction strike in Quebec.

Economists project a temporary slowdown to 2 percent in the fourth-quarter before the economy accelerates to average quarterly growth of 2.5 percent in 2014, according to separate estimates compiled monthly by Bloomberg.

After an initial burst following the recession, Canada’s economy began to slow last year amid weak global demand for its goods, a slump in business investment and temporary factors such as maintenance shutdowns in the oil industry, flooding and strikes. Canada has averaged annualized quarterly growth rates of 1.3 percent since the start of 2012, less than half the pace seen over 2010 and 2011.

The country’s benchmark stock index has risen 7.6 percent this year, trailing the 26.7 percent advance in the U.S. Standard & Poor’s 500 Index. The Canadian dollar has lost 6.4 percent against its U.S. counterpart in that period. The nation’s government bonds are down 1.5 percent in 2013, compared with a 2.2 percent drop for U.S. Treasuries, according to Bank of America Merrill Lynch indexes.

A 126,300 rise in employment this year puts the country’s labor market on pace for its third worst annual result in the past 12 years. Inflation has been below the Bank of Canada’s 2 percent target for 18 consecutive months, the longest stretch outside of recessions since the late 1990s. Weak inflation has assumed “increasing importance,” the Bank of Canada said in its last statement on Oct. 23 when it left its 1 percent benchmark rate unchanged.

The slowdown prompted Governor Stephen Poloz last month to drop language about the need for future interest rate increases.

Whether the economy can tighten economic slack will depend on a recovery in trade. Net exports — the difference between shipments abroad and imports — has been a drag on the economy every year since 2009, according to Bank of Canada reports.

Trade was probably also the biggest factor restraining third-quarter growth, economists estimate, with Canada averaging trade deficits of C$920 million ($868 million) in the three months ended September, the highest quarterly gap in a year. (…)

Bank of Canada Senior Deputy Governor Tiff Macklem said in a speech last month the economy will need to expand by at least 2.5 percent in order to begin absorbing the “current material degree” of slack.

To get there, business investment and net exports will need to contribute at least 1 percentage point to growth, he said. The central bank is confident Canada is on that path.

It projects Canada’s expansion will accelerate to 2.6 percent in 2015, of which 1.1 percentage points will come from exports and business investment, closing the output gap by year-end.

“The Bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self-sustaining,” Poloz told lawmakers on Oct. 29 in Toronto. “This will take longer than previously projected.”

Why Goldman Sachs recommends shorting the loonie

As The Globe and Mail’s Scott Barlow reports, the Wall Street giant forecasts the Canadian dollar will sink to 88 cents U.S. One of its reasons is that Canada has been running a current account deficit.

There are other reasons, but that one tops the list.

“Since the global financial crisis, significant external imbalances have built up in the Canadian economy,” Goldman said.

“In 2008, the current account balance fell from a surplus of 1 per cent of GDP to a deficit of 3 per cent – and it has remained stable at this level since then,” the bank said in its report.

“The main reason for this has been a decline in manufacturing exports, which fell by about 30 per cent during the crisis.”

Over the past several quarters, Goldman added, money flowing into Canada has slowed markedly, and interest rates are low, and expected to stay there.

“It is also important to highlight that the Canadian dollar remains clearly overvalued on our … fair value model,” the bank said.

“Combined with the weak current account position, there are therefore good fundamental reasons for a weaker CAD,” it added, referring to the currency by its symbol.

Goldman’s forecast for the loonie, as Canada’s dollar coin is known, is lower than most. Chief currency strategist Camilla Sutton of Bank of Nova Scotia, for example, projects the dollar, which has been hovering just below 95 cents U.S. of late, will sink to 93 cents by mid-2014, and then pick up again. (…)

“Canada’s current account gap of just over 3 per cent of GDP is manageable, but continues to suggest the Canadian dollar is overvalued,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

“A stronger U.S. economy and softer loonie should help narrow the gap somewhat in 2014.”

 

NEW$ & VIEW$ (22 NOVEMBER 2013)

Philly Fed Weaker Than Expected

(…)  the Philly Fed Manufacturing report for November came in at a level of 6.5, which was down from last month’s reading of 19.8 and weaker than consensus expectations for a level of 11.9.  (…) every component declined in this month’s report. 

New orders remained high enough……but unfilled orders turned negative……and inventories jumped……and the workweek collapsed…

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through November. The ISM and total Fed surveys are through October. (CalculatedRisk)

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To conclude, Confused smile.

Brent Hits One-Month High; Iran in Focus

Brent crude for January delivery was up 28 cents at $110.37 a barrel on ICE Futures Europe. U.S. crude-oil futures were down 32 cents at $95.12 a barrel on the New York Mercantile Exchange.

Iran remained a major focus of attention. Negotiations continue Friday between the Islamic republic and six states that have the power to revoke sanctions on it related to its enrichment of uranium.

If Iran’s crude flows back into the market next year there could be negative price repercussions for the benchmark, Brent. But JBC Energy Markets noted that not every country stopped importing Iranian crude over the past 18 months.

China was among those who continued but it imported in much less last month.

“Chinese imports of Iranian crude were cut quite drastically in October – falling by 47% month-on-month,” they wrote in a note to clients.

The import reduction could be seen as a move to secure more favorable terms for next year’s prices, “something we have seen in previous years,” said JBC. (…)

Target Shoppers Put Less in Their Carts

The retailer said shoppers put fewer items in their shopping cart for the first time in at least six quarters.

(…) Target expects sales at stores open at least a year to be flat for the current quarter. This comes after it said it lost customers for the fourth straight quarter, ringing up 1.3% fewer transactions in its latest quarter. Shoppers spent more per transaction as they selected higher priced items like electronics, but they put fewer items in their shopping cart for the first time in four years, a sign that they are financially constrained.

Some Target customers say they are reluctant to visit for fear they will be tempted to spend too much, according to Kathee Tesija, executive vice president of merchandising, a phenomenon that Target first saw pop up during the recent recession.

Wal-Mart earlier this month cut its full-year profit forecast for a second time this year, predicting flat sales. Best Buy said this week its margins in the fourth quarter would take a hit because it will match discounts.

U.S. Wholesale Prices Fall 0.2%

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September.

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September, the Labor Department said Thursday. That was largely due to falling energy costs. Core prices, which exclude the volatile food and energy components, rose 0.2%, in line with the soft readings in recent months.

ECB’s Praet warns of deflationary pressures in euro zone

(…) Praet, who sits on the ECB’s six-strong Executive Board, said the financial crisis had saddled the euro zone with a debt burden unique in Europe’s post-war history because it has created a more deflationary environment.

“This is a very different context for the correction of expectations (about income), which is more of a debt overhang,” he told a conference at the Bank of France.

“It has more signs of a balance-sheet recession, which is a priori more of a deflationary environment than what we had in the 1960s,” added Praet, who is in charge of the ECB’s economics portfolio. (…)

 German Business Confidence Increases as Recovery on Track

German business confidence surged to the highest level in more than 1 1/2 years, signaling that the recovery in Europe’s largest economy remains on track even after growth slowed in the third quarter.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 109.3 in November from 107.4 in October. That’s the highest since April last year and exceeds all 43 economist forecasts in a Bloomberg News survey. The median was for an increase to 107.7.

Business hopes up for global economy
FT/Economist barometer shows increased optimism among executives

Global business leaders are increasingly optimistic that economic conditions will improve over the coming months, according to the FT/Economist Global Business Barometer.

In the latest results, 41 per cent of the executives surveyed said they thought the global economy would get “better” or “much better” over the next six months, with 45 per cent saying they expected it to remain the same.

This is a big jump from three months earlier, when only 27 per cent expected the global economy to improve, and 48 per cent expected it to say the same.

However, the results should be read with a degree of caution, as this quarterly edition of the survey gave the respondents additional positive options (“much better” and “better”) rather than simply the “better” of previous surveys.

Out of more than 1,800 business people polled, 53 per cent said their companies were looking to expand significantly in two to five countries over the next six months. (…)

TIME TO BE SENTIMENTAL?

Yesterday, I posted on Barclays’ analysis

that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.

Well, the highly volatile AAII survey now shows 29.5% bearishness while bullish sentiment declined sharply. Go figure!

 

NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

The government’s main gauge of retail sales, encompassing spending on everything from cars to drinks at bars, rose a healthy 0.4% from September, despite the partial government shutdown that sent consumer confidence tumbling early in the month. Sales climbed in most categories, with gains in big-ticket items as well as daily purchases such as groceries. (…)

Wednesday’s report showed some clear pockets of strength: Sales of cars rose at the fastest pace since the early summer. Sales in electronics and appliance stores also rose robustly. Stores selling sporting goods, books, and music items saw business grow at the fastest pace in more than a year.

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High five Let’s not get carried away. Car sales have been slowing sequentially lately and are near their past cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis) (next 2 charts from CalculatedRisk):

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Meanwhile, core sales ex-cars remain on the weak side as this Doug Short chart shows:

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Consumer Prices Ease Amid Lower Fuel Costs

The consumer-price index rose only 1% in October from the same month last year, the smallest 12-month increase since October 2009, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, rose 1.7% from a year ago, similar to the modest gains seen in recent months. The Fed targets an annual inflation rate of 2%.

Prices fell 0.1% last month from September, the first drop since April. Core prices increased 0.1%.

Last month, the overall decrease reflected gasoline prices, which were down 2.9% for the month. (Chart from Haver Analytics)

High five Let’s not get carried away. Core inflation remains surprisingly resilient given the weakness of the economy and the large output gap. On a YoY basis, core CPI is stuck within 1.6% and 1.8% and the Cleveland Fed median CPI just won’t slip below 2.0%. Looking at monthly trends, core CPI has slowed to 0.1% over the last 3 months from 0.2% in the previous 3 months. Yet, the median CPI only slowed to 0.1% MoM last month after a long string of 0.2% monthly gains. The inflation jury is still out.

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Pointing up No Renaissance for U.S. Factory Workers as Pay Stagnates

(…) The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.

Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jersey lost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics. (…)

Some of the states where factory jobs are growing the fastest are among the least unionized. In 2012, 4.6 percent of South Carolina workers were represented by unions, as did 6.8 percent of Texans, according to the U.S. Bureau of Labor Statistics. New York, the most-unionized, was at 24.9 percent.

Assembly workers at Boeing’s nonunion plant in North Charleston, South Carolina, earn an average of $17 an hour, compared with $27.65 for the more-experienced Machinists-represented workforce at the company’s wide-body jet plant in Everett, Washington, said Bryan Corliss, a union spokesman. (…)

In Michigan, which leads the U.S. with 119,200 factory jobs added since June 2009, automakers are paying lower wage rates to new hires under the United Auto Workers’ 2007 contracts. New UAW workers were originally paidas little as $14.78 when the contract was ratified in 2011, which is about half the $28 an hour for legacy workers. Wages for some of those lower-paid employees have since risen to about $19 an hour and the legacy rate hasn’t increased. (…)

General Electric Co. says it has added about 2,500 production jobs since 2010 at its home-appliance plant in Louisville, Kentucky. Under an accord with the union local, new hires make $14 an hour assembling refrigerators and washing machines, compared with a starting wage of about $22 for those who began before 2005. While CEO Jeffrey Immelt has said GE could have sent work on new products to China, it instead invested $1 billion in its appliance business in the U.S. after the agreement was reached.

The company is also moving work to lower-wage states. In Fort Edward, New York, GE plans to dismiss about 175 employees earning an average of $29.03 an hour and shift production of electrical capacitors to Clearwater, Florida. Workers there can earn about $12 an hour, according to the United Electrical, Radio and Machine Workers of America, which represents the New York employees. (…)

Existing Home Sales Fall 3.2%

Sales of previously owned homes slipped for the second consecutive month in October, the latest sign that increased interest rates are cooling the housing recovery.

Existing-home sales declined 3.2% in October to a seasonally adjusted annual rate of 5.12 million, the National Association of Realtors said Wednesday. The results marked the slowest sales pace since June.

The federal government shutdown last month pushed some transactions into November, Realtors economist Lawrence Yun said. The Realtors group reported that 13% of closings in October were delayed either because buyers couldn’t obtain a government-backed loan or the Internal Revenue Service couldn’t verify income.

The number of homes for sale declined 1.8% from a month earlier to 2.13 million at the end of October. The inventory level represents a five-month supply at the current sales pace. Economists consider a six-month supply a healthy level.

Americans Recover Home Equity at Record Pace

The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose, a sign supply shortages may ease as more owners are able to sell.

The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter, according to a report today from Seattle-based Zillow Inc. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place. (…)

Fingers crossed“The pent-up demand from people who now have enough equity to sell their homes will help next year,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “We’ll see the effect during the spring selling season. Not a lot of people put their homes on the market during the holidays.” (…)

About 10.8 million homeowners were underwater on their mortgages in the third quarter, down from 12.2 million in the second quarter, Zillow said. About 20 million people had negative equity or less than 20 percent equity, down from 21.5 million in the prior three months. Las Vegas, Atlanta, and Orlando, Florida, led major metropolitan areas with the highest rates of borrowers with less than 20 percent equity. (…)

DRIVING BLIND, TOWARDS THE WALL

Fed Casts About for Bond-Buy Endgame

Federal Reserve officials, mindful of a still-fragile economy, are laboring to devise a strategy to avoid another round of market turmoil when they pull back on one of their signature easy-money programs.

Minutes of the Oct. 29-30 policy meeting, released Wednesday, showed officials continued to look toward ending the bond-buying program “in coming months.” But they spent hours game-planning how to handle unexpected developments and tailoring a message to the public to soften the impact of the program’s end. (…)

Fed officials are hoping their policies will play out like this: The economy will improve enough in the months ahead to justify pulling back on the program, which has been in place since last year and has boosted the central bank’s bondholdings to more than $3.5 trillion. After the program ends, they will continue to hold short-term interest rates near zero as the unemployment rate—which was 7.3% last month—slowly declines over the next few years. (…)

One scenario getting increased attention at the Fed: What if the job market doesn’t improve according to plan and the bond program becomes ineffective for addressing the economy’s woes? The minutes showed their solution might be to replace the program with some other form of monetary stimulus. That could include a stronger commitment to keep short-term interest rates low far into the future, a communications strategy known as “forward guidance.”

Top Fed officials have been signaling in recent weeks that their emphasis is shifting away from the controversial bond-buying program and toward these verbal commitments to keep rates down. (…)

Punch The reality is that, do what you want, say what you want, market rates are market rates.

Millennials Wary of Borrowing, Struggling With Debt Management

Young people are becoming warier of borrowing — but they’re also getting worse at paying bills.

(…) Total debt among young adults actually dropped in the last decade to the lowest level in 15 years, separate government data show, with fewer young adults carrying credit-card balances and one in five not having any debt at all.

And yet, Millennials appear to be running into more trouble when paying their bills — whether on credit cards, auto loans, or student loans.

Millennial borrowers are late on debt payments roughly as much as older Gen-X borrowers, Experian’s data show. Millennials also use a high share of their potential borrowing capacity on cards, just like Gen-Xers, meaning they’re as likely to max out on cards.

Since Millennials tend to have fewer assets than Gen-Xers and other generations, as well as shorter credit histories, they end up with the worst average credit score — 628 — of any demographic group.

Pointing upMillennials have “the worst credit habits,” and are “struggling the most with debt management,” Experian said in a report.

(…) A study by the Federal Reserve Bank of New York recently suggested high student-loan balances may have encouraged young adults to reduce their credit-card balances between 2005 and 2012.

Other young adults may be less willing to take risksin a weak economy, whether by splurging on furniture for a new apartment, moving geographically or starting businesses — things that often require debt.

What Experian’s data suggest is that the Millennials who are in fact borrowing are struggling to do so responsibly, at least partly because of the nation’s 7.3% jobless rate, sub-3% growth and $1 trillion student-loan tab — all things that are weighing disproportionately on young people, especially those without college degrees.

As the Journal reported last week, the share of student-loan balances that were 90 or more days overdue in the third quarter rose to 11.8% from 10.9%, even as late payments on other debts dropped. While the incidence of late payments on Millennials’ overall debts isn’t alarming yet, it’s big enough to drag down their credit scores, Experian said. (…)

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

In December 2010, I wrote INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!, warning people not to give much weight to bullish sentiment readings:

I have analyzed 30 years of data plotting the II bull-bear % difference against the DJ Total Stock Market Index of 5000 US stocks. Extreme readings are above +/-25%. However, I have easily identified 11 periods when the “contrary” indicator rose to cross the extreme +30% level which were followed by strongly rising markets. Obviously not useful on that side of the ledger. (…)

Overall, never mind the extreme positives, they are essentially useless. The extreme negatives (bullish) are few but generally very good although some require patience and staying power.

My analysis was based on relative bullishness, bulls minus bears like in the chart below, but Barclays here takes another angle looking at the absolute level of bears:

According to the US Investors’ Intelligence Survey there are currently 40% more bulls than bears. At the end of August, the same survey indicated just 13.4% more bulls that bears. Global equities have rallied by 9% since then. Other measures also confirm this bullish hue, but none have displayed anything close to the relationship that the Investors’ Intelligence Survey has had recently with forward returns.

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Here’s the more interesting part:

Closer examination reveals that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.

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GOOD READ: ASSESSING THE PARTY’S DECISIONS

CLSA’s Andy Rothman is one of the most astute analyst living in China:

China’s leaders have issued strong statements in support of private enterprise and the rights of migrant workers and farmers which, if implemented effectively, will facilitate continued economic growth and social stability.  By announcing relaxation of the one-child policy and the abolishment of ‘re-education through labor’, the Party acknowledged it needs to curb human rights abuses and re-establish trust.  The creation of new groups to coordinate economic and national security policy signal that Xi Jinping has quickly consolidated his power as Party chief, raising the odds that the decisions announced Friday will be implemented quickly.

The brief, initial communique issued when the Party Plenum closed last Tuesday was dense, obtuse and packed with outdated political slogans.  But the more detailed ‘decision document’ published Friday was, for a Communist Party report, unusually clear, particularly in its support for private enterprise and markets.

Strong support for entrepreneurs

The most important signal from the Party leadership was strong support for the private sector and markets. Private firms already account for 80% of urban employment and 90% of new job creation, as well as two-thirds of investment in China, so improving the operating environment for entrepreneurs is key to our relatively positive outlook for the country’s economic future.  Friday’s document did not disappoint in this respect.

Although the Party still cannot rise to the challenge of actually using the Chinese characters for ‘private’ sector’, continuing to refer to it as ‘non-public’, they did pledge to ‘unwaveringly encourage, support and guide the development of the non-public economy’, and declared that ‘property rights in the non-public economy may equally [with the state sector] not be violated.’

In Friday’s document, the Party said it would ‘reduce central government management over micro-level matters to the broadest extent’, called for an end to ‘excessive government intervention’, and said that ‘resource allocation [should be] based on market principles, market prices and market competition.’  The world’s largest Communist Party declared that ‘property rights are the core of ownership systems’, and called for ‘fair competition, free consumer choice, autonomous consumption, [and] free circulation of products and production factors.’  The document also says China will ‘accelerate pricing reform of natural resources’ to ‘completely reflect market supply and demand’, as well as the costs of environmental damage.

The Party also pledged to reduce red tape and administrative hurdles to doing business.  Zhang Mao, the head of the State Administration for Industry and Commerce, explained that ‘registering a business will become much more convenient in the near future.’  And Miao Wei, minister for industry and information technology, announced that implementation of the plenum decision would lead his agency to eliminate at least 30% of administrative approval procedures by the end of 2015.

Friday’s document called for better protection of intellectual property rights, as well as the ‘lawful rights and interests of investors, especially small and mid-sized investors.’  The Party said it would create a ‘marketized withdrawal system where the fittest survive’, and a better bankruptcy process.

Party leaders did say that public ownership would remain ‘dominant’, but they clearly didn’t mean it.  Repeating this language, especially in light of the fact that private firms are already dominant, is, in our view, just a rhetorical bone thrown to officials whose political or financial fortunes are tied to state-owned enterprises. (…)

 

The Party did, however, raise the share of SOE income that has to be paid into the national security fund to 30% by 2020, up from 10-20% now.

In what may be a warning that serious SOE reform is likely down the road, the Party did call for the elimination of ‘all sorts of sector monopolies, and an end to ‘preferential policies . . . local protection . . . monopolies and unfair competition.’

Hukou reform coming

If the most important message from the plenum is renewed support for the private sector, a close second is the decision to reform the hukou, or household registration system.  This is important because there are more than 230m urban residents without an urban hukou, accounting for one-third of the entire urban population.

According to the official news agency, Xinhua, ‘Friday’s document promised to gradually allow eligible rural migrants to become official city residents, accelerate reform in the hukou system to fully remove restrictions in towns and small cities, gradually ease restriction in mid-sized cities, setting reasonable conditions for settling in big cities while strictly controlling the population in megacities.’ (…)

Hukou reform will be expensive, but the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services.  In cases where local governments cannot afford these services, the central government will transfer the necessary funds.  Hukou reform will be rolled out gradually, and in our view:

Will reduce the risk of social instability from the 234m people living in cities who face de jure discrimination on a daily basis, particularly in eligibility for social services.

May increase the supply of migrant workers in cities at a time when the overall labour force is shrinking.

Should improve consumption by strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.

Should result in higher productivity in manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. (…)

The one-child policy will be relaxed by ‘implementation of a policy where it is permitted to have two children if either a husband or a wife is an only child,’ a change from the current rules which require both the husband and wife to be only-children in order to qualify to have a second child.

Wang Peian, the deputy director of the national health and family planning committee, said that the Party will allow each province to decide when to switch to the new policy, but Friday’s announcement, in our view, spells the rapid end of the one-child policy.

Wang Feng, one of China’s leading demographers, told us over the weekend that Friday’s announcement was a ‘decisive turning point.’  But he also reminded us that in a May CLSA U report, he explained why ending the one-child policy is likely to result in a temporary uptick in the number of births, but is unlikely to change the longer-term trend towards a lower fertility rate.  The current fertility rate of 1.5 could drop even lower in the future, closer to Japan and South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. (…)

Xi consolidates power

The plenum decided to create two new groups within the government, a National Security Council and the Leading Small Group for the Comprehensive Deepening of Reform.  This signals that Party chief Xi Jinping has quickly and effectively consolidated his political power, far beyond, apparently, what his predecessor Hu Jintao was able to achieve.  This bodes well for Xi’s ability to implement the reform decisions announced Friday. (…)

 

NEW$ & VIEW$ (15 NOVEMBER 2013)

Empire State Manufacturing Contracts: General Business Conditions Lowest Since January

The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3.

image

 

Shoppers Can’t Shake the Blues

 

Wal-Mart Stores Inc. offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

The downbeat outlook from the world’s largest retailer was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend, putting a further drag on an already sluggish economy.

Kohl’s Corp., a department-store chain that caters to middle-income customers, also reported weak results Thursday and said it scaled back its inventories ahead of the holidays, signaling a lack of confidence in its ability to boost sales. (…)

Wal-Mart lowered its full-year profit forecast on Thursday and warned sales would be flat through the end of January, after sales fell for a third straight quarter at U.S. stores open at least a year. (…)

Even higher-end retailers experienced softness in the third quarter. Nordstrom Inc. reported late Thursday that its profit fell to $137 million from $146 million a year earlier, as sales at stores open at least a year slipped 0.7%. The company attributed part of the decline to a shift in the timing of its big Anniversary Sale, but also saw some weakness.

“We’ve experienced softness in our full line store sales with third quarter results consistent with recent trends but lower than what we anticipated as we started the year,” Blake Nordstrom, the company’s president said on a conference call with analysts. (…)

On Wednesday, Macy’s Inc. delivered strong sales and an upbeat holiday outlook that sent its stock up more than 9%. But the department-store chain is boosting discounts to draw in shoppers even at the expense of profit margins.

Kohl’s said it plans to ratchet up holiday marketing and discounts to bring more people into its stores after it cut its full-year profit outlook Thursday. The department-store chain reported its third-quarter earnings fell 18% as comparable-store sales dropped 1.6%. (…)

The Bentonville, Ark., retailer could face additional pressure on sales from the expiration of a temporary boost in food-stamp benefits. The expiration on Nov. 1 is expected to leave nearly 48 million Americans with $5 billion less to spend this fiscal year, which ends in September, according to the Center on Budget and Policy Priorities. The hit follows the end of a payroll tax break that had saved 2% of consumers’ monthly paychecks.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps, or about $14 billion of the $80 billion the U.S. Department of Agriculture says was appropriated for food stamps in the year ended in September 2012. (…)

“A reduction in gas prices and grocery deflation will help customers stretch their budgets, but they’re still trying to absorb a 2% payroll tax cut, uncertainty over Washington, and a lack of clarity around personal health care costs that are all headwinds,” Mr. Simon said. (…)

U.S. Worker Productivity Climbs

More productive U.S. workers supported faster economic growth in the third quarter, but slower business investment might limit future gains.

Labor productivity, or output per hours worked, increased at a 1.9% annual rate from July through September, the Labor Department said Thursday.

Second-quarter productivity growth was revised down to a 1.8% pace from a previous reading of 2.3%. Productivity held flat from a year ago because the increase in output was matched by an increase in hours worked.

Meanwhile, unit labor costs, a key gauge of inflationary pressure, declined at a 0.6% annual pace last quarter. From a year earlier, unit labor costs are up 1.9%—running ahead of the increase in consumer prices.

Industrial Output Runs Hard to Stay in Place

Industrial production in September returned to where it was before the recession, based on a Fed index. But certain index components are way above or below that level, providing a telling set of statistics about today’s economy.

September’s industrial-production data, which cover the period just before the government shutdown, seemed encouraging at first glance. The index expanded 0.6% over the prior month, well ahead of predictions and the fastest pace in seven months. But the strength lay entirely in utilities output, which makes up a 10th of the index. The sixth-warmest September on record for the contiguous 48 states followed a summer that was milder than the year-ago period. Actual manufacturing production, which comprises three-quarters of the index, rose by just 0.1%.

U.S. Trade Gap Widens as Exports Slip

The U.S. trade deficit widened 8%, as a fall in U.S. exports in September suggests the global economy is struggling to gain traction quickly enough to offset tepid demand at home. (Chart from Haver Analytics)

Exports fell 0.2% while imports rose 1.2%, causing the trade gap to expand for the third-straight month.

The report suggests exports, after rising earlier in the year, slumped during the summer as demand weakened in Europe, Japan and developing economies. The three-month moving average of exports, a reading of the underlying trend, slipped for the first time since May. (…)

U.S. exports to the EU from January through September fell 2.7%, compared with the same period a year earlier. Exports to the U.K. were down 15.1%, and exports to Germany fell by 4.5%.

The European Union accounts for roughly 17% of the market for U.S. exports.

The U.S. is also seeing lower demand from Japan, whose export-driven economy is struggling amid weak overseas demand. U.S. exports to Japan this year through September were down 7.6% compared to a year earlier.

September’s drop in overall exports was broad-based, with falling demand for American industrial materials as well as consumer and capital goods.

U.S.: Downward revisions to Q3 GDP?

The US goods and services trade deficit widened unexpectedly in September to US$41.8 bn, the worst tally in four months. The deterioration was due to rising imports and declining exports, the latter falling for a third month in a row in real terms. The results are worse than what the BEA had anticipated when it estimated Q3 GDP last week.

As today’s Hot Charts show, the agency estimated a less brutal deterioration in net exports of goods than what actually transpired. And with real exports of goods growing in Q3 at about a third of the pace estimated by the BEA, and real imports of goods growing faster in the quarter than what the agency had anticipated, it seems that trade may
have been a drag on the economy in Q3 rather than a contributor as depicted in last week’s GDP report.

image

We now expect a three-tick downgrade to Q3 US GDP growth from 2.8% to 2.5% annualized. Unfortunately, the bad news doesn’t end there. September’s weak trade results are also bad for the current quarter. The higher imports probably mean that the Q3 stock build-up was larger than first thought, meaning that there’s perhaps a higher likelihood of
an inventory drawdown (and hence a moderation in production) in the current quarter. If that’s the case, Q4 US GDP growth could be running only at around 1% annualized. (NBF)

Consumer Borrowing Picks Up

Americans stepped up their borrowing in the third quarter, a trend that could boost the economy—but, in a worrying sign, the nation’s student-loan tab also rose.

Household debt outstanding, which includes mortgages, credit cards, auto loans and student loans, rose $127 billion between July and September to $11.28 trillion, the first increase since late last year and the biggest in more than five years, Federal Reserve Bank of New York figures showed Thursday.

Taking on Debt Again

Mortgage balances, the biggest part of household debt, increased by $56 billion amid fewer foreclosures, while Americans bumped up their auto-loan balances by $31 billion.

At the same time, the amount of education loans outstanding, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to surpass $1 trillion for the first time, according to this measure. The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as late payments on other debts dropped.

Yellen Defends Fed’s Role, Current Path

Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

The nominee said at the hearing that the decision about winding down the program depended on how the economy performs. “We have seen meaningful progress in the labor market,” Ms. Yellen said. “What the [Fed] is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

She also repeated the Fed’s message that even after the bond program ends, it will keep short-term interest rates near zero for a long time because the bank doesn’t want to remove its support too fast.

The Fed’s next meeting is Dec. 17-18.

Surprised smile  Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

imageThe Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending.

John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Euro Zone’s Rebound Feels Like Recession

(…) Gross domestic product in the 17-country euro zone grew only 0.1% last quarter, or 0.4% at an annualized rate, data published on Thursday showed. The rate of growth was down sharply from the second quarter, when policy makers and economists began to hope that the clouds were clearing for the troubled currency bloc. (…)

Even Germany’s economy grew only 0.3% last quarter, or 1.3% annualized, as weak demand in Europe and patchy global growth hit its exports. (…) France and Italy, the bloc’s next-biggest economies after Germany, both suffered small contractions.

image

 

Industrial production down by 0.5% in euro area

IP in the Euro 17 area was down 0.5% MoM in September and for Q3 as a whole. IP of durable consumer goods were –2.6% MoM in September and –4.1% QoQ in Q3.

image

EU Inflation Slows to Four-Year Low

The EU’s official statistics agency said Friday consumer prices rose 0.9% in the 12 months to October, a lower annual rate of inflation than the 1.3% recorded in September, and the lowest since October 2009.

Eurostat also confirmed that the annual rate of inflation in the 17 countries that share the euro was 0.7% in October, the lowest level since November 2009.

image

 

Core inflation was +0.8% in October, down from 1.0% in September.

 

Brussels warns Spain and Italy on budgets

France’s ‘limited progress’ on reforms also under spotlight

Brussels has warned Spain and Italy that their budget plans for 2014 may not comply with the EU’s tough new debt and deficit rules, a move that could force both countries to revise their tax and spending programmes before resubmitting them to national parliaments.

The verdicts, the first time the European Commission has issued detailed evaluations of eurozone government budgets, also include a warning to France that its economic reform plan constitutes only “limited progress” towards reforming its slow-growing economy.

Earnings Season Ends

The third quarter earnings season came to an end today now that Wal-Mart (WMT) has released its numbers.  Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates.  Below is a chart comparing this quarter’s beat rate to past quarters since 2001.  Since the bull market began in March 2009, this is the second worst earnings beat rate we’ve seen.  Only Q1 of this year was worse. 

(…) the 8-quarter streak of more companies lowering guidance than raising guidance was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points.  When will companies finally offer up positive outlooks on the future?

China to Ease One-Child Policy

Xinhua said authorities will now allow couples to have two children if one of the parents is an only child. Currently, couples are restricted to one child except in some areas.

Morning MoneyBeat: Nasdaq Nears 4000

The Nasdaq Composite is poised to cross 4000 for the first time in 13 years, an event that is sure to prompt comparisons to the dot-com bubble. It shouldn’t.

(…) The Nasdaq is now dominated by mostly profitable companies. Names such as Pets.com have come and gone, replaced by more mature companies, plenty of which sit on loads of cash and pay hefty dividends. Apple Inc,, Microsoft Corp. and Cisco Systems Inc. are bigger and return much more cash to shareholders now than they did during the go-go days. The index also trades at a far cheaper multiple than it did 14 years ago.

Light bulb  Berkshire Reports New Stake in Exxon Mobil

Warren Buffett’s Berkshire Hathaway disclosed it had picked up a $3.45 billion stake in Exxon Mobil, a sizable new addition to its roughly $107 billion portfolio of stocks.

The stock was likely picked by Mr. Buffett himself, given the size of the investment.

 

NEW$ & VIEW$ (11 NOVEMBER 2013)

DRIVING BLIND

 

Jobs Strength Puts Fed on Hot Seat

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

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

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

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

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

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

image  image

However,

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

And these peculiar stats:

Retail boom coming to a store near you?

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

Amazon to Hire 70,000 Workers For Holiday Selling Season

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

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

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

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

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

image

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

Confused smile More quirks:

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

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

From the GDP report:

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

 

image

 

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

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

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

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

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

Other notable findings:

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

Nonetheless:

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

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

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

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

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

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

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

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

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

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

Elsewhere:

S&P Cuts France’s Credit Rating

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

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

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

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

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

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

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

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

Surprise Jump in China Exports

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

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

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

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

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

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

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

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

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

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

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

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

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

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

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

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

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

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

INFLATION/DEFLATION

Central Banks Renew Reflation Push as Prices Weaken

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

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

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

image

The Economist agrees (tks Jean):

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

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

Race to Bottom Resumes as Central Bankers Ease Anew

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

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

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

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

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

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

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

EARNINGS WATCH

From various aggregators:

  • Bloomberg:

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

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

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

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

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


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

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

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

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

SENTIMENT WATCH

 

Stocks Regain Broad Appeal

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

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

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

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

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

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

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

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

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