NEW$ & VIEW$ (14 OCTOBER 2013)

Democrats in Senate Press New Front in Budget Battle

Lawmakers attempting to avoid a debt default remained at loggerheads and escalated the standoff by reopening the contentious issue of automatic spending cuts.

Capitol Hill at sea(…) Democrats made plain that one of their top priorities was to diminish the next round of across-the-board spending cuts, known as the sequester, due to take effect early next year.

Many Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), oppose retreating from those cuts. That set up a clash that seemed almost as intense as the one that caused budget talks between House Republicans and President Barack Obama to collapse Friday.

“Total federal spending has now gone down for two years in a row—the first time that’s happened since the Korean War,” Mr. McConnell said Sunday. With the additional sequestration cuts on tap for 2014, the budget limits have produced “the most significant spending reduction in modern history and Senate Republicans will not accept anything that undoes these cuts.” (…)

Confused smile  Lawmakers said they would watch Monday’s opening of financial markets to see whether investors, already jittery, show greater concern. That, in turn, could affect the climate for further negotiations. Crying face

(…) a possible compromise that sources familiar with Senate budget talks said that Mr. Reid floated to Mr. McConnell on Sunday: Continue spending at current levels until mid-December, set up a mechanism for negotiating over the across-the-board cuts and other budget matters for the rest of the year, and extend the debt limit for about six months. It wasn’t immediately clear what Mr. McConnell’s response was.

Thinking smile  Europe Stocks Slip as Stalemate Drags On

U.S. Stock Futures Fall on Debt Concerns



In case you forgot, we are entering Q3 earnings season with some 161 companies reporting this week including 70 S&P 500 companies.

Earnings rose an estimated 1.4 percent for Standard & Poor’s 500 Index companies last quarter, trailing gains of 3.8 percent in the previous three months and an average 10 percent over 15 years. Analysts have reduced the quarterly estimate by 75 percent since June, according to data compiled by Bloomberg.

The official S&P estimates are now $26.62 for Q3, down 0.8% from the September 30 estimates. Q4 estimates have been shaved a nickel to $28.83. Here’s Zacks Research’s early read:

Total earnings for the 31 S&P 500 companies that have reported results are up +9.8% with 51.6% beating earnings expectations, while total revenues for these companies are up +1.4% and 45.2% are beating top-line expectations.

This is still early going, but the results thus far are weaker than what we have seen for this same group of companies in recent quarters. The +9.8% earnings growth in Q3 for these companies compares to +18.2% in Q2 and the 4-quarter average of +17.8%, while the +1.4% revenue growth is below Q2 and the 4-quarter’s average of +4.2%. The beat ratios are similarly tracking lower.

The weak comparisons are primarily because of the Finance sector. If we exclude results from the Finance sector, the remaining companies that have reported results are tracking better than what those same companies reported in Q2 and the last few quarters. (…)

Ghost  This good analysis should worry you:

Total earnings growth for the remaining 469 companies is barely in the positive relative to the same period last year (+0.1%) and in the negative excluding the Finance sector (-1.1%). The composite earnings growth rate, combining results from the 31 companies that have reported with the 469 still to come, is +0.9% for the S&P 500. (…)

While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.

Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector.

But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $259.5 billion in Q2, surpassing Q1’s $255 billion record. But they are expected to reach $269.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +4.9%.

Pointing up  The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn’t much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.

Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.

Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.

Punch  I suggest you also read “Myths about cash” below.

Eurozone production grows 1%
Data are latest sign of recovery in currency bloc

Industrial production in Germany, Europe’s largest economy, grew 1.8 per cent in August, lifting the entire eurozone, while in France, the second-largest economy, it rose by a much slower 0.2 per cent.

However, the most encouraging news came from Portugal and Greece, two of the countries worst affected by the sovereign debt crisis, which recorded robust growth in industrial production. In Portugal it rose 8.2 per cent while in Greece it increased 1 per cent.

I am more concerned by the facts that France’s IP rose only 0.2% after cratering 2.3% in the four months previous and that Italy’s IP declined 0.3% after falling 1.0% in July and 0.8% in the March-June period. These are two heavyweights.

The reality is that Eurozone IP rose 1.0% in August, offsetting July’s 1.0% decline. During the 4 months to June, IP rose 1.5%, thanks primarily to automobile production as IP of durable consumer goods rose 2.3% between March and June and 0.6% in July-August. A very slow grind (full Eurostat report)


Here’s the YoY trend:



Housing Affordability Hits Four-Year Low

Housing affordability hit a four-year low in August amid steady gains in home prices during the spring and higher interest rates during the summer.

(…) At prevailing interest rates in August, the mortgage payment on the median priced home stood at $851, or around 16% of the median U.S. income. By contrast, the equivalent mortgage payment one year earlier, at $683, accounted for 13.3% of the median income. (…)

But the affordability figures show unmistakable evidence of how rising interest rates hurt housing affordability in July and August because median prices didn’t rise in those months, even as the average monthly payment went up due to rising rates. The average monthly payment rose from $787 in June to $851 in August — even though median prices fell slightly from June to August.

Monthly payments last stood above $850 in November 2008, and monthly payments as a share of income last stood at 16% in July 2009.

Mortgage rates have declined modestly since August, which means that the 16% figure could be — for this year, at least—the high watermark for the payment-as-a-share-of-income metric. (…)

Home for Sale, With Freebies Home builders, concerned by flagging sales due to rising prices and higher mortgage rates, have boosted cash incentives and materials upgrades in some markets.


China’s Exports Shrink

(…) Exports fell 0.3% in September compared with the year-ago period, data from the General Administration of Customs showed Saturday. This was sharply down from August’s 7.2% growth and far below economists’ median forecast of a 5.5% expansion.

The drop in exports was broad-based, with volumes to the European Union, Hong Kong and Taiwan dropping. Exports to many developing economies also fell. (…)

The overinvoicing of exports to disguise capital inflows—which started in the second half of last year and lasted into the first half of this year but has since waned—inflated the base in September 2012, said RBS economist Louis Kuijs, adding that actual export growth for September is estimated at about 1.7% in U.S. dollar terms.

(…) Chen Weiqiang, president of Guangdong Xinyi Underwear Group Co., a garment maker in the southern Chinese city of Foshan, said the slowdown in demand for his products hit last year and hasn’t abated.

“I have no obvious feelings that exports are recovering in the garment industry,” he said. “My company can still get orders, but profits are really pathetic due to rising labor costs, and we have actively cut export volume.” (…)

Compared with a year earlier, China’s exports to Hong Kong slipped 4.1%, while exports to Taiwan decreased 8.6% and exports to the European Union fell by 1.1%. However, exports to the U.S. rose 4.2% and to Japan rose 1.3%. (…)

September imports rose 7.4% compared with a year ago, slightly up from the 7% rise in August and beating economists’ median forecast of a roughly 6.8% increase. (…)

China’s crude-oil imports in September surged to 6.27 million barrels a day, surpassing a previous record set in July of 6.17 million barrels a day. September’s crude imports were up 28% when compared with the corresponding month last year. (…)

China inflation at 7-month high, limits room for easing despite export tumble

China’s annual consumer inflation rate rose to a seven-month high of 3.1 percent in September as poor weather drove up food prices, limiting the scope for the central bank to maneuver to support the economy even as exports showed a surprise decline.

The inflation rate was higher than a median forecast of 2.9 percent in a Reuters poll and August’s 2.6 percent, but was still below the official target of 3.5 percent for 2013.

Month-on-month, consumer prices rose 0.8 percent, the National Bureau of Statistics said, bigger than a rise of 0.5 percent expected by economists.

Food prices gained 1.5 percent in September from August due to droughts and floods in some areas, pushing up the CPI by 0.51 percentage points, Yu Qiumei, a senior statistician at the bureau, said in a statement.

In annual terms, food prices jumped 6.1 percent.

Producer prices fell 1.3 percent from a year earlier, a smaller fall than the 1.4 percent expected by the market and the 1.6 percent drop in August.

However, there was some relief to manufacturers struggling to cope with profit-eating price declines, as producer prices rose 0.2 percent from August.


Inflation in China: veg now, pork later From Nomura via FT Alphaville:

We see a rising risk of CPI inflation sitting above 3.5% for some months in 2014, as pork prices enter the upswing phase of the cycle, given that the ratio of corn prices to pork prices was below the important level of 6x for most of H1 2013 (Figure 10). Historically, pork prices have exhibited long cycles, with upswings preceded by this ratio dropping below 6x. Concerns over inflation will make monetary policy easing unlikely in 2014, because with the benchmark deposit rate at only 3% there is little room to cut rates.

India’s headline inflation at 7-month high, another rate hike seen
Gulf oil production hits record
Region defies fears of impact from US shale revolution

(…) Saudi Arabia, Kuwait, the United Arab Emirates and Qatar set aggregate production records in each of the last three months, according to fresh estimates from the International Energy Agency. In September they accounted for 18 per cent of global demand – a level only matched twice in IEA data stretching back to the 1980s. (…)

As a result Gulf states are capturing more of the fast growing Asian market. India imported 44 per cent of its crude from Saudi Arabia, Kuwait, Qatar and the UAE in July, up from 36 per cent in 2011, while China relies on the countries for a quarter of its imports compared to 21 per cent in 2007.

A rapid return to production among other Opec members, for example through a resolution to Iran’s nuclear standoff with the US, could yet leave the Gulf states exposed to the US shale revolution. And some analysts argue that Opec could yet need to discuss production cuts when its oil ministers next meet in Vienna in December.

The record output has provided a windfall for the oil-dependent monarchies. The 16.4m barrels a day produced by the four states during the third quarter was worth more than $150bn at today’s prices of more than $100 a barrel.

The principal beneficiaries have been Saudi Arabia, which has increased output more than 10 per cent since the start of the year to a record of 10.19m b/d in August, and the UAE where the 2.77m b/d produced in September was a record, and 7 per cent higher than at the start of the year. Kuwait has also set a series of production records this year, but Qatar has been unable to raise production significantly.

It also means the region remains crucial to the world’s major powers. The US continues to import almost 60m barrels a month from the Gulf, a number that has actually increased in the last three years even as US imports overall have fallen.

The WSJ digs deeper:

Increasing oil output in the U.S. and Canada are already redirecting global oil flows, but those being hit the hardest are West Africa’s crude-oil producers and the refineries of Western Europe that are suddenly competing with cheap North American products.

The four Gulf kingdoms that dominate OPEC have actually increased their exports to the U.S. over the past three years, the Financial Times reports, taking advantage of Nigeria’s fragile infrastructure and Libya’s political chaos.

Instead, the rise of Asia as a consuming region is having just as big a sway on the flows of money, products and political capital. (…)

A report from the Asian Development Bank anticipates that oil-deficient Asia will have to increase net imports of crude and refined products by more than 10 million barrels a day by 2035, The Wall Street Journal’s Simon Hall reports.

The ADB’s forecast echoes that of the International Energy Agency, which forecasts Southeast Asia’s oil imports will more than double by 2035. This is a region that excludes China, which is just beginning what should be a lengthy stay at the top of the list of the world’s crude-oil importers. (…)

This great shift brings with it new factors—logistical, political and financial—for the oil markets to consider.

Singapore will become a sweet spot for the new trade flows, with the Malacca and Singapore straits joining the Strait of Hormuz as the oil market’s narrow waterways of note, the Journal’s Eric Yep writes. The New York Times pinpoints Fujairah, in the United Arab Emirates, as a products hub to rival Singapore and Rotterdam.

Economically, surging crude-oil imports will put strain on the Asian economies.

The IEA says that spending on net oil imports for the whole region is expected to reach $240 billion, from $77 billion today, and that the $51 billion the region currently spends each year on annual fossil-fuel subsidies should be reorganized to discourage wasteful consumption. (…)


Conventional wisdom says that corporate America is flush with cash which it refuses to invest. Sometimes, aggregated data can be misleading. Factset just published an analysis of S&P 500 companies which reveals the true picture:

Cash & short-term investment balances (“cash”) in the S&P 500 (ex-Financials) rose by 13.5% year-over-year and settled at a balance of $1.27 trillion at the end of Q2 2013. The elevated growth in cash partially resulted from 13.3% growth in free cash flows (operating cash flows less capital expenditures) and continued net debt issuance. The $39.4 billion in cash flows represented the twelfth consecutive quarter of cash inflows from net debt issuance.

Index-level, fixed capital expenditures increased by 4.1% in Q2. This marks the second consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Though seven of the nine sectors under consideration increased year-over-year CapEx spending in Q2, the Energy sector, which represented a third of all spending, reduced CapEx by 0.1% for the second consecutive quarter. Chesapeake Energy’s prior divestments and strategic shift were again the primary reason for the decline—the company’s move to bring spending in line with cash flow continues to be compared against periods of higher investment. In addition, Hess Corp. and Occidental Petroleum also reduced capital expenditures. Hess cited the need for a balance with cash inflows, while Occidental Petroleum cited a need for cost reductions. Hess should also experience reduced capital spending expectations following its close of the multi-billion dollar divestiture of Samara-Nafta ZAO and its Russian oilfield properties in Q2.

S&P 500 companies have thus been growing capex at an 18.5% annual rate for 18 consecutive quarters until a few oil companies decided, because of their own particular situation, to strategically reduce their capex. In spite of this:

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 7.5% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit an 11% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales are in-line with the ten-year average.


Low capex at the national level may thus have more to do with smaller businesses as this NFIB chart suggests:image


S&P 500 (ex-Financials) cash and marketable securities balances grew 13.5% year-over-year to a balance of $1.27 trillion at the end Q2. In particular, the growth of 15.4% in the Information Technology sector was most significant due to the sector’s enormous cash weight in the
overall index (36.7%). The sequential growth rate for the aggregate cash balance was 3.3%.


However, 10 companies account for 37% of the cash pile which they have grown 20% in the past year. The remaining 490 companies’ cash grew 10% YoY. Furthermore, only 4 of the S&P’s 9 main sectors had positive free cash flow growth in Q2.

Shareholder distributions in the form of dividends and the repurchase of stock ($164.3 billion) increased 22.3% year-over-year and 23.5% sequentially. On the other hand, Cash inflows from debt issuance were positive ($39.4 billion) for the twelfth straight quarter.

As this next chart shows, average net debt has increased over the last 10 years and all sectors but one currently have higher debt levels than their 10-year average.


This confirms Moody’s findings shown in my N&V post of October 7: corporate America is getting more leveraged, not cash rich as some aggregated stats make us believe.


Ghost  The capex and cash myths having been debunked, we can now more objectively assess how the economy would fare in the event of rising interest rates. Capex would slow even more and corporate profits would feel the adverse effect of leverage. And even though the Fed controls short-term rates, it has little control on longer-term market rates it found out in recent months.


NEW$ & VIEW$ (16 AUGUST 2013)

Storm cloud  US industrial production stalls

US industry suffered a disappointing start to the third quarter, but there are signs that growth may pick up again as we move through the quarter.

Industrial production stalled in July, showing no change against expectations of a 0.3% increase. Manufacturing output fell unexpectedly, down 0.1% against June. Even when looking at the three-month trend, the picture is one of a stalling industrial sector. Production was flat in the three months to July, the weakest performance since last October and indicating that the economy has slowed sharply from the 1.3% three-month growth rate seen at the beginning of the year and the 1.0% rise seen in the first quarter.


This clearly represents a weaker than anticipated start to the third quarter, and will raise question marks over the solidity of the US economic recovery.

Fingers crossed  However, July may represent a low for the sector. The easing in the rate of growth over the course of the year to date has been signaled in imageadvance by Markit’s PMI survey and, reassuringly, having slumped to an eight month low in June, the PMI picked up in July, hitting a four-month high. The improvement in the survey data – which have provided a very reliable guide to the official numbers – suggests that the official data will pick up again in coming months.

Importantly, new order inflows gained further momentum during the
month, which should drive ongoing production growth. Manufactures are reporting that domestic demand is providing the main impetus to renewed growth, but perhaps the most important driver of new orders in July was the export market. With growth picking up in Europe, US firms are able to offset some of the weakness evident in emerging markets. July’s rise in export orders was the largest so far this year.


The survey’s broadest indicators for general activity and new orders were
positive for the third consecutive month, although they fell back from higher readings last month. Responses indicated flat shipments and only slight increases in overall employment this month. The surveyʹs indicators of future activity, although not as high as in July, continue to suggest that firms expect continued growth over the next six months.



These four charts illustrate how weak things are in the Philly Fed district. New orders did spike in the last 2 months but unfilled orders remain pretty low. Yet, employment rose in the last 2 months, even though the workweek is still not expanding.

image image

image image

Open-mouthed smile  Jobless Claims in U.S. Decline to Lowest Level Since 2007

The number of claims for jobless benefits dropped by 15,000 to 320,000 in the week ended Aug. 10, the least since October 2007, according to Labor Department data. The Labor Department revised the previous week’s figure to 335,000 from an initially reported 333,000.


Inflation, up 0.2%, Moves Closer to Fed Target

Rising prices for a broad range of consumer items in July pushed overall inflation up from historically low levels, a development that could reassure Federal Reserve officials as they consider dialing back their bond-buying program in coming months.

The seasonally adjusted CPI for all urban consumers rose 0.2% (1.9% annualized rate) in July. The CPI less food and energy increased 0.2% (1.9% annualized rate).

According to the Federal Reserve Bank of Cleveland, the  median Consumer Price Index rose 0.2% (2.0% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.7% annualized rate) during the month.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.8%, the CPI rose 2.0%, and the CPI less food and energy rose 1.7%


The weakness in the U.S. economy is having little effect on inflation which stubbornly remains in the 2.0% range, however you measure it. Core CPI has advanced 0.2% in each of the last 3 months (+2.4% a.r.). The median CPI has also gained 0.2% in each of the last 4 months and 5 of the last 6 months. Only the 16% trimmed-mean CPI remains below 2.0%, rising at a 1.6% annualized rate in the past 3 and 6 months.

The Rule of 20 uses total CPI for its inflation component. Now +2.0%, it is up measurably from the +1.1% recorded last April but back to its February reading.


Homebuilder Confidence in U.S. Jumps to Highest Level Since 2005

The National Association of Home Builders/Wells Fargo index of builder confidence climbed to 59 from a revised 56 in July, which was lower than previously reported, the Washington-based group reported today.

High five  Prospective buyer traffic was unchanged at 45.

U.S. housing starts, permits rise in July but below forecasts

U.S. housing starts and permits for future home construction rose less than expected in July, suggesting that higher mortgage rates could be slowing the housing market’s momentum.

The Commerce Department said that housing starts increased 5.9 percent to a seasonally adjusted annual rate of 896,000 units. June’s starts were revised up to show a 846,000-unit pace instead of the previously reported 836,000 units.

Permits to build homes rose 2.7 percent in July to a 943,000-unit pace.

Last month, groundbreaking for single-family homes, the largest segment of the market, fell 2.2 percent to a 591,000-unit pace, the lowest level since November last year. Starts for multi-family homes jumped 26 percent to a 305,000-unit rate, reversing the prior month’s decline.

Permits for multi-family homes rose 12.6 percent to a 330,000-unit rate. Permits for single-family homes fell 1.9 percent to a 613,000-unit pace.

This chart from CalculatedRisk shows the impact that rising prices and rates are having on the singles market. Even the multi-family, mainly rental, seems to have peaked out.



Turtle  Wal-Mart Deepens Gloom Around Retailers

The WSJ today is writing about the apparent disconnect between official retail data and the actual trends reported by retailers. Yesterday’s New$ & View$ commented on that with this chart from Pictet illustrating the problem:image

Today’s WSJ article adds more details:

Wal-Mart Stores Inc., Macy’s Inc. and Kohl’s Corp. this week all reported weak results for their most recent quarters, raising concerns over whether shoppers will keep their pocketbooks open through the back-to-school and holiday seasons.

The disappointing results have left executives at retailers, restaurants and consumer-goods companies puzzling over the disconnect between the poor showing for sales and recent economic indicators that should point to a stronger consumer. (…)

But so far in this retail reporting period, those positive indicators aren’t showing up at the cash register.

Wal-Mart delivered the latest dose of bad news, reporting weak sales that it expects to persist into the fall.

The retailing giant said its fiscal second-quarter earnings rose 1.3%, but sales grew more slowly than expected, as consumers in both mature and emerging markets curbed their spending and traded down to lower-priced products. Wal-Mart, the world’s largest retailer, cut its forecast for sales and profit for the year as its low-income customer base remains cautious.

Sales at U.S. stores open at least a year fell 0.3% after Wal-Mart had said they would be no worse than flat. It was the second consecutive decline for the key retail metric. Wal-Mart expects flat comparable-store sales in the U.S. in the current quarter as well.

Wal-Mart’s release followed a disappointing report Wednesday from department-store chain Macy’s, which cut its profit forecast for the year and warned that its shoppers remain stretched.

Both retailers reported declining traffic, a worrying sign, and Macy’s said it would boost its marketing efforts to bring consumers back in. On Thursday, Kohl’s added to concerns about a weak back-to-school season when it said its fiscal second-quarter profit fell 3.5% and lowered its earnings forecast for the full year.

The downbeat trend has been widespread. Teen retailers American Eagle Outfitters Inc.  and Aéropostale Inc. warned this month their results will be worse than they had expected, and Thursday afternoon, high-end retailer Nordstrom Inc. lowered its profit and sales outlook for the year.

Bloomberg adds:

Li & Fung Ltd.— the world’s largest supplier of clothes and toys — also reported first-half profit that missed analyst estimates amid sluggish demand from U.S. customers.

Li & Fung’s U.S. customers — which include Wal-Mart, Target Corp. and Kohl’s — “have all adopted a more cautious view toward their winter sales this year” as the “retail environment is tracking with the slow pace of economic recovery,” the company said in a statement.

Part of the problem seems to come from the high pent-up demand for cars and other housing-related goods that stretched consumers can no longer postpone, forcing them to cut into other expenditures.


Car sales plateaued in recent months and the housing market may be feeling the effects of rising prices and interest rates, raising the danger of a pretty weak second half.

But don’t you worry, the higher-end consumers, in large part bankers, strategists and economists, are there to save us all!

Still, economists caution against reading too much into Wal-Mart’s results.

“Wal-Mart caters to people who shop from paycheck to paycheck, as opposed to people who go out and buy cars,” said Miller Tabak economist Andrew Wilkinson. “The tailwind from rising housing and stock values that is hitting the higher-end consumers doesn’t apply here.”

Consumer spending will continue its steady increase, he said, which is already around $50 billion above its prerecession peak of $375 billion a month.


On Thursday, even high-end department store Nordstrom said that its sales trends were softer than anticipated and reduced full-year guidance. (FT)

Here’s the reality of most Americans:

In a separate Labor report Thursday, Americans’ real average weekly earnings declined by 0.5%. The drop was due to a decline in average hourly wages, adjusted for inflation, and a decline in the average work week.

As of May, 47.6 million Americans, or one in seven, received food aid – highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010.

Ladies and gentlemen, fasten your seat belts, we have entered the twilight zone.

Incidentally, today’s FT publishes

99 percent badgeWhy inequality matters
Tim Harford on why rising unfairness hurts us all

(…) Between 1993 and 2011, in the US, average incomes grew a modest 13.1 per cent in total. But the average income of the poorest 99 per cent – that is everyone up to families making about $370,000 a year – grew just 5.8 per cent. That gap is a measure of just how much the top 1 per cent are making. The stakes are high.

I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But what really should concern us is that the two reasons are not actually distinct after all. The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them. (…)

And at some point, the poor react…

This comes on the heels of Bill Moyers’ chronicles of “Two American Families”, well worth the 83 minutes of your time. Moyers’ interview by Charlie Rose is also interesting.

Something to watch because this is unsustainable.


Rail-Truck Shipments Reveal Holiday Sales Clues

Total U.S. intermodal volume — goods shipped by more than one means of transportation — rose 4 percent for the four weeks ended Aug. 10 compared with a year ago, according to figures from the Washington-based Association of American Railroads. That’s the biggest increase since March.

The data will reflect a change in pace “before it becomes a broad phenomenon” and supplement commentary from trucking and railroad companies, Gayle said.

It seems that intermodal traffic has been pretty volatile lately. It fell sharply in the first half of July and bounced back thereafter but ended down 2.5% YoY in July. Trucking volume has been weaker lately as well. Here’s the Cass Freight Index which combines all freight, at the end of July:



Eurozone shows unconvincing rise from recession as GDP expands in Q2

Markit sets the record straight on Europe’s q2 GDP (my emphasis):

(…) However, the GDP increase looks likely to overstate the true health of the Eurozone economy in the second quarter. In particular, the increase looks to be based on unsustainable factors, notably a weather-related upturn and a record jump in car output. The upturn also sits in contrast to weaker business survey data (notably in France, where the largest question marks hang over the GDP data). This combination of
temporary-looking growth drivers and the contrast with the survey data suggests that the impressive performance may not be repeated in the third quarter. (…)

The variations in national performance underline the fragility of the upturn, especially when deeper looks at the data suggest that the strength of growth in both France and Germany looks somewhat unsustainable.

imageThe volatile industrial production was driven by a surprisingly strong jump in production of durable goods, led in turn by a 15.7% surge in car production – the largest ever increase seen since data were first
available in 1991. This increase not only looks unsustainable but is also at odds with the PMI data, which tend to give a better picture of the underlying health of the manufacturing sector as a whole.

imageReassuringly, however, although the manufacturing PMI data remained weak in the second quarter, a return to growth is clearly evident in July, suggesting the goods producing sector is on course to expand in the third quarter.

Perhaps most striking, however, are the jumps in GDP in austerity-encumbered Portugal and France, both of which leave question marks over what the underlying growth drivers were of such robust rates of expansion in these countries. (In fact, besides the volatility in the German numbers, almost all of the divergence between the weaker PMI signal for the second quarter and the contrasting GDP expansion can be explained by the variance in the French PMI and GDP numbers.)

Pointing up The robust French data in particular contrast markedly with PMI data which, although having bottomed-out earlier in the year, pointed to imagean ongoing deterioration of output in the second quarter. The government’s statistics body, INSEE, assigned the 0.5% GDP increase primarily to rising domestic demand and an upturn in inventories. Both of these could fade in the third quarter: INSEE themselves note that consumer confidence remains close to its all time low, and inventories will be cut unless demand moves higher.

Finally, there is also some evidence that the upturns in Germany and France reflected a rebound in domestic spending after adverse weather deterred shoppers at the start of the year; something which would not be
especially noticeable in the manufacturing and services PMIs and is again a growth driver that would be only temporary.

Euro-Area Exports Increase 3% as Inflation Holds Below 2%

Exports from the 17-nation bloc rose a seasonally adjusted 3 percent in June from May, when they dropped 2.6 percent, the European Union’s statistics office in Luxembourg said today. Shipments from Germany, Europe’s biggest economy, gained 6.3 percent, after a 9 percent decline the prior month. The euro-area inflation rate remained at 1.6 percent in July, a separate report showed.

Euro-zone imports increased 2.5 percent in June after a 2.1 percent decrease the prior month, and the trade surplus increased to 14.9 billion euros ($19.9 billion) from 13.8 billion euros.

Exports from France, the second-biggest euro-area economy, fell 1.7 percent, while Italian shipments rose 1.4 percent, today’s data showed. Spanish exports dropped 2.4 percent.


Dutch gloom as housing bubble deflates
Bankruptcies rose to highest level in last three months

(…) Household spending has been falling for three straight years, and it dropped again 2.4 per cent year on year in the second quarter, dragging the entire economy down with it. (…)

At the heart of the Netherlands’ persistent case of the blues, economists agree, is a slowly deflating housing bubble. Property values in the Netherlands rose as much in the boom years before 2008 as in peripheral European countries like Spain, leaving the country with a mortgage debt load larger than any other in the eurozone.

The bubble was fuelled by the fact that Dutch mortgage interest was fully tax deductible, a strong incentive in a country of high income taxes. Dutch banks developed a series of unique, complex mortgage products to help borrowers maximise the tax benefits.

Prices have fallen 21 per cent since their 2008 peak, leaving 30 per cent of all Dutch mortgage holders underwater, owing more than their houses are worth. Few experts think the bottom has been reached, and with their net worth falling, homeowners are spending less. (…)


Final Q2 ’13 Earnings and Revenue Beat Rates

(…) overall it was a relatively good season.  As shown below, the final earnings beat rate came in at 62.2%, which was the highest reading since Q3 2011.  The final revenue beat rate came in at 56.6%.  While top line numbers weren’t as strong as bottom line numbers, the revenue beat rate this quarter was still stronger than 3 of the past 4 earnings seasons.

Buffett targets cars, oil and satellite TV
Berkshire Hathaway invests the most money in stocks since 2011

Warren Buffett put money to work in cars, oil and satellite television in the second quarter as the chief executive of Berkshire Hathaway and his deputies invested the most money in stocks since 2011, according to regulatory filings.

Berkshire increased its holdings in General Motors, the carmaker recovering from bankruptcy and a government bailout, and made two new investments: in Dish Network, the broadcaster controlled by Charles Ergen, and Suncor Energy, a Canadian oil company. (…)

Mr Buffett now controls 40m GM shares worth $1.4bn, up from 25m at the end of the first quarter. Berkshire also disclosed that at the end of June it owned more than 17.8m Suncor shares worth more than $500m.

The new stake in Dish adds to Berkshire’s media holdings, as it already owns 6.8 per cent of DirecTV, worth $2.3bn, in addition to holdings in the Washington Post Company, and Liberty Media. However, the small size of the Dish investment, at $23m, suggests it is the responsibility of one of Mr Buffett’s two investment deputies, Todd Combs and Ted Weschler.

Mr Buffett also added slightly to his largest holding, in Wells Fargo, taking Berkshire’s stake to 8.7 per cent of the consumer bank, worth $20bn.

Berkshire reduced some holdings, exiting a stake in newspaper publisher Gannett, while reducing investments in Kraft and Mondelez, the snack group it spun out last year.

Berkshire’s biggest holdings are mostly consumer-facing groups with strong brands, including Coca-Cola, American Express and Procter & Gamble. The exception is Berkshire’s one technology holding, a $13bn stake in IBM.


NEW$ & VIEW$ (15 AUGUST 2013)

Storm cloud  Wal-Mart U.S. same-store sales slip 0.3 percent

Wal-Mart Stores Inc posted disappointing quarterly U.S. sales on Thursday as shoppers pinched by higher payroll taxes and gas prices made fewer trips to its stores.

In addition to missing analyst estimates, Wal-Mart also showed a jump in inventory levels in Q2 and warned on emerging markets.

Storm cloud  Macy’s Shoppers Remain Cautious

Second-quarter transactions, which the company considers a proxy for traffic, declined 1.6%, a development that Chief Financial Officer Karen Hoguet said was a concern. Customers remain stretched and may have decided to spend their money on other goods, she said on a conference call with analysts.

Macy’s CEO Terry Lundgren blamed disappointing sales on “consumers’ continuing uncertainty about spending on discretionary items in the current economic environment.” Like other retailers, it said it had to discount to clear merchandise after a cool spring hurt summer merchandise sales. Inventory growing faster than sales also was a cause for concern.

Same-store sales slipped 0.8%.

Pointing up  Many large retailers posted tepid sales recently and complained of a generally cautious consumer. Yet, retail sales data were pretty good in the last 3 months, contrary to the trend displayed by consumer spending in the national accounts as this chart from Pictet shows. Hmmm…Driving blind indeed!


Fingers crossed Consumers Step Up Borrowing

After years of struggling to shed debt, Americans are finally gaining enough confidence in their finances to step up borrowing for autos, homes and other goods—a shift that could boost the economic recovery.

Auto lending increased by $20 billion in the second quarter from the previous quarter, the largest gain in seven years, Federal Reserve Bank of New York figures showed Wednesday. Americans also increased their credit-card balances, reversing a first-quarter decline, and took out more mortgages.

At the same time, total consumer debt declined by $78 billion last quarter to $11.15 trillion, putting it 12% lower than its peak in the fall of 2008 during the recession and at its lowest level since 2006.

Most of the adjustment was due to a decline in the amount of debt tied to outstanding home loans, likely due to lenders’ write-offs from foreclosures and recent gains in home prices that helped owners sell.

One exception is student debt. The amount of education loans outstanding has increased every quarter since the New York Fed began tracking the figure in 2003. They now account for almost 9% of all consumer debt, up from 3% a decade ago.

Debt Load

The New York Fed data also showed that Americans are doing a better job keeping up with their bills.

Only 5.7% of all consumer debt is 90 days or more late, the lowest level since 2008. The delinquency rate fell in every category measured last quarter, including mortgages and credit cards. (…)

The 90-day delinquency rate nearly tripled from the start of the recession to the first quarter of 2010, when it peaked at 8.7%. (…)

Lenders now appear to be loosening their standards. The total number of credit-card accounts, which fell sharply in the recession’s wake, posted the strongest gain in two years last quarter. (…)

But Macy’s said yesterday

that new banking regulations implemented after the financial crisis is making it harder for Macy’s to sign up new credit-card customers, which also contributed to weaker sales.

More Car Loans Than Mortgages in U.S.

There are now more auto loans than mortgages in the U.S., but most of them are going to older Americans, according to new data from the Federal Reserve Bank of New York.

(…) Americans were holding 84 million auto loans in the second quarter of 2013, compared with 80.6 million mortgages, the New York Fed’s Household Debt and Credit Report showed. (…)

Most auto loans go to older borrowers, with the greatest share going to people aged 30 to 49. That trend predated the recession, but the recovery has come faster for older Americans. The only group originating more loans than before the recession are people over 50, likely a result of aging Baby Boomers.

But 18 to 29 year olds haven’t seen much of a recovery. (…) People aged 18 to 29 are taking out 24% fewer loans than they did prior to the recession, compared to about 10% fewer loans for 30 to 49 year olds. (…)

Auto  The reality is that many young people are trying to avoid having to buy a car while the growing number of older folks are traveling less. (Chart from The Liscio Report)


Producer Price Index: No Change in Headline Inflation, Core Rises 0.1%

(…) the July Producer Price Index (PPI) for finished goods shows no change month-over-month, seasonally adjusted. Core PPI rose 0.1% (which the BLS rounded up from 0.05%).

Year-over-year Headline PPI is at 2.12% (rounded to 2.1% by the BLS), down from last month’s 2.5%, which was the highest since March 2012. In contrast, Core PPI at 1.20% is at its lowest YoY since June 2010.

Click to View


(Ed Yardini)

image(Scotia Capital)

(Ed Yardini)


With Exports At 4-Year Low, Is Japan Missing Boat to China? New figures released by Japan’s government-affiliated trade promotion body show that not only is trade with China falling, officials expect the downturn to be prolonged.

(…) But even as emotions have calmed, Jetro officials say China’s suddenly weaker economy has led to continued reductions in exports. Lackluster private consumption in China contributed to a 47.7% drop in exports of digital cameras and other audio-visual equipment, the figures showed.

(…) Jetro predicts Japanese exports to China will stay keep declining, and deficits will widen further.

China’s slowdown and the ongoing diplomatic tensions have made more and more Japanese companies wary of investing in China. According to Jetro, Japan’s direct investment in China for January-June fell 31.1% from a year earlier to $4.9 billion.

This compares with a 55.4% increase to a record $10.3 billion for the Association of Southeast Asian Nations.

Pointing up The shift is likely to continue, as Japanese companies seek a safer political environment and lower labor and business costs, said Jetro Chairman Hiroyuki Ishige.

Chinese Banks Feel Strains After Long Credit Binge

China’s banking sector is showing some cracks, as years of rapid credit growth in the country has led to serious debt problems for local governments and companies and numerous white-elephant projects.

In a bid to beef up their capital base, the country’s four largest state-owned banks by assets—Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd.—recently won board approval to issue up to a total of 270 billion yuan ($44.1 billion) in securities in the next two years. The figure is bigger than the total amount of issuance by the Big Four in the past two years.

A recent analysis by ChinaScope Financial, a research firm partly owned by Moody’s Corp., shows that China’s banks would have to raise between $50 billion and $100 billion through equity sales in the next two years to maintain their current capital-adequacy levels.


Assets in China’s banking sector jumped 126.5% to about $21 trillion as of the end of last year from four years earlier, making it the fastest-rising banking system among emerging economies, according to Fitch Ratings Inc. But it also is the most thinly capitalized among those economies, with the amount of equity representing only 6.5% of total assets in China’s banking system. By contrast, equity represents an average of 11.2% among 48 emerging economies.

Chinese regulators are taking note. In a rare interview with state broadcaster China Central Television on Aug. 2, Shang Fulin, chairman of the China Banking Regulatory Commission, acknowledged that important risks stem from loans to local governments and those created outside banks’ balance sheets.

FT Alphaville adds this:

Gavyn Davies looked at China’s fiscal space to address another financial crisis last week, and said it appeared the country’s government could cover bad debts equivalent to 20 per cent of GDP (similar to the amount that was “bad-banked” in 1999) by taking its public debt ratio to 100 per cent – not out of the ballpark terrible, compared to other countries. However, he points out that the rapid rise in debt ratios mean that this must be addressed quickly.


From The Short Side of Long:

  • AAII survey readings came in at 40% bulls and 27% bears. Bullish readings fell by 4% while bearish readings rose by 2%. The AAII bull ratio (4 week average) currently stands at 64%, which indicates very high optimism amongst the retail investment community.  For referencing, AAII bull ratio survey chart can been seen by clicking here, while AAII Cash Allocation survey chart can be seen by clicking clicking here.

Chart 1: Bearish sentiment is almost non existent these days…

Source: Short Side of Long

  • Investor Intelligence survey levels came in at 52% bulls and 19% bears. Bullish readings increased by 3%, while bearish readings fell by 1%. Bearish readings have now fallen to the lowest level since early 2011 as equity market was in the process of a major top and a 20% sell off. Furthermore, II bull ratio remains above 73% a serious “sell signal” territory that traders and investors alike should consider. For referencing, II bull ratio survey chart can been seen by clicking here.
  • NAAIM survey levels came in at 76% net long exposure, while the intensity fell to 130%. the recovery in sentiment by fund managers, seen in this survey, now lines up with the mood of the remain survey indicators. For referencing, recent NAAIM survey chart can been seen by clicking here.
  • Other sentiment surveys continue to rise towards extreme optimism. However, the movement  has been rather mute in recent weeks. Consensus Inc survey is still rising towards extreme territory, while Market Vane survey is on a cusp of it too. All in all, nothing new to report here.

Chart 2: Retail investment community continues to pile into stocks

Source: Short Side of Long

  • Last weeks ICI fund flows report showed “equity funds had estimated inflows of $714 million for the week, compared to estimated inflows of $4.20 billion in the previous week. Domestic equity funds had estimated outflows of $926 million, while estimated inflows to world equity funds were $1.64 billion.”The chart above shows that retail investment community continues to pile into stocks this late in the rally (S&P is up over 55% from October 11 lows). Rydex fund flows are also rising too. Recent data showed that leveraged funds (usually not featured here) showed 6 times more bullish inflows relative to bearish funds. That is the highest reading for the bull market since it began in March 09. For referencing, recent Rydex fund flow chart can be seen by clicking clicking here.

High five  You may want to read this before acting on the above: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!


NEW$ & VIEW$ (14 AUGUST 2013)

Wealth Effect Drives U.S. Consumers to Keep Spending Consumers spent more freely at restaurants and department stores in July, despite holding the line on big-ticket purchases, a sign the economy could gain steam in the second half of the year.

imageRetail sales climbed a seasonally adjusted 0.2%, the fourth consecutive month of increases, the Commerce Department said Tuesday. The previous month’s gain was revised up to 0.6% from 0.4%, amid brisk demand for cars and furniture. (…)

Sales of cars and parts, which rose a revised 2.9% in June, retreated 1% last month. A 0.9% increase in spending at service stations reflected July’s flare-up in gas prices—to an average of $3.68 for a gallon of regular from $3.49. (Gas prices since have edged down to $3.56 a gallon.) Core retail sales—a measure that leaves out cars, gas and building materials—increased 0.5% in July, after rising 0.1% in June.

The details from Haver Analytics:



Weekly chain store sales are not bouncing back much, even though many states had tax-holiday periods in the last 2 weeks. Back-to-school sales seem on the weak side, never a good omen for Thanksgiving and Christmas.



Euro-Zone Economy Returns to Growth

The euro-zone economy emerged more strongly than expected from its longest postwar contraction in the three months to June, but a resolution to its twin banking and fiscal crises remains a distant prospect.

Eurozone GDPThe European Union’s official statistics agency Wednesday said the combined gross domestic product of the currency area’s 17 members was 0.3% higher than in the first three months of the year, but 0.7% lower than in the second quarter of 2012. It was the fastest quarterly expansion since the first three months of 2011. (…)

Germany’s GDP, the broadest measure of goods and services produced across the economy, swelled 0.7% in the second quarter from the preceding period, in line with economists’ forecasts. That equals annualized growth of 2.9%, the statistics office said. By comparison, the U.S. economy expanded by an annualized 1.7% in the second quarter, while Japan’s growth rate eased to 2.6%.

The French economy also played its part, with a 0.5% expansion, according to statistics bureau Insee. But an even greater source of surprise was Portugal, where economic activity picked up by 1.1%—by far the strongest growth rate recorded in Europe. Portugal is in the third year of an international bailout, and its economy hadn’t grown since the fourth quarter of 2010. Its return to growth in such a decisive manner will encourage euro-zone policy makers to believe it can become financially self-reliant next year, as planned. It may also ease pressure on Prime Minister Pedro Passos Coelho’s government to soften austerity ahead of local elections in September.

The economies of Austria, Estonia, Belgium, Slovakia and Finland also expanded. The economies of Italy, Spain and the Netherlands contracted, but less sharply than in the first quarter. Cyprus’s economy once again experienced the sharpest decline, with GDP down 1.4% on the quarter following a 1.7% drop in the previous period. (…)

The euro zone’s return to growth is likely to be particularly welcome news for neighboring nations for which the currency area is by far the most important export market. Figures released Wednesday indicated some countries in central and Eastern Europe are already benefiting from the end of the euro zone’s contraction.

The Czech Republic emerged from six quarters of contraction—its longest since the early 1990s—to record growth of 0.7% on the quarter, while Poland’s growth rate doubled to 0.4%. However, Hungary’s economy slowed, Romania’s growth rate was unchanged at a low 0.3%, and Bulgaria’s economy contracted slightly. (Chart from FT)

U.S. Import Prices Rise 0.2%

Prices for goods imported into the U.S. rose for the first time in five months in July, though the gain was almost entirely due to fuel costs, signaling that overall inflationary pressures remain tame.

A Labor Department report Tuesday showed that U.S. import prices rose 0.2% from the prior month, far less than the 0.8% gain forecast by economists. Excluding fuel, import prices fell by 0.4%, in line with the declines of recent months.

July import prices were up just 1% from a year ago, a reflection of slow economic growth abroad.

Imports account for over 16% of U.S. GDP, so they are an important component of domestic inflation.

Bumper grain crop to weigh on prices
Cereals stocks to recover from US drought of last year

(…) World corn, rice, soyabean and wheat production will break records this year, the US Department of Agriculture estimated this week. The International Grains Council in London expects grain inventories in critical exporters such as Argentina, Australia, Europe, Russia and the US to rise 40 per cent. (…)

The US government this year predicts a record domestic corn crop of almost 350m tonnes, up 28 per cent from 2012, and the third biggest soyabean crop, of 88.6m tonnes. Corn was $4.55¼ per bushel in Chicago on Tuesday, down 3.6 per cent.

Corn stocks left over from last year’s stunted US harvest are expected to dwindle to 18.3m tonnes by the end of this month, the lowest in 17 years. By August 2014, stocks are forecast to double.

Soren Schroder, chief executive of Bunge, the New York-listed agricultural trading house, said: “We’re clearly in a transition from a very high-priced, super-tight stocks environment to one of possible sizeable surpluses”.

The US impact will be compounded by a healthy wheat crop in Europe and record corn and soyabean harvests in South America. “Brazilian farmers have had a great harvest this year,” said Marcos Rubin, analyst at Agroconsult in Florianópolis, Brazil.

US crops, planted late due to wet spring weather, could still be vulnerable to summer heat or an early frost.


NEW$ & VIEW$ (17 JULY 2013)

Consumer Inflation Climbs 0.5%

Consumer prices are up 1.8% from a year earlier. Excluding the volatile food and energy categories, prices rose a milder 1.6% over the past year.

Much of June’s gain in overall prices came from a 6.3% increase in seasonally adjusted gasoline costs. Actual prices at the pump rose only slightly, but they failed to follow the expected pattern of declining in the weeks after Memorial Day, causing the adjusted number to rise.

From the Cleveland Fed:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in June. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.2% annualized rate) during the month.

The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (5.9% annualized rate) in June. The CPI less food and energy increased 0.2% (2.0% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.8%, and the CPI less food and energy rose 1.6%


Haver Analytics offers the salient details:

Prices for goods less food and energy gained 0.2% (-0.2% y/y) following several months of having been unchanged. Apparel prices led the way higher with a 0.9% jump (0.7% y/y) while medical care goods prices rebounded 0.5% (-0.1% y/y). New car and truck prices gained 0.3% (1.2% y/y). Furniture and bedding costs rose 0.2% (-0.5% y/y) and home appliance prices also increased 0.2% (-1.9% y/y). Recreation goods prices were off 0.6% (-1.8% y/y).

Core services prices increased 0.2% (2.3% y/y). Medical care service prices rose 0.4% (2.8% y/y). Shelter costs (32% of the CPI) gained 0.2% (2.3% y/y) while owners equivalent rent of primary residences increased 0.2% (2.2% y/y). Public transportation prices fell 0.9% (+3.6% y/y) and transportation services costs slipped 0.1% (+2.5% y/y).

But Doug Short has the best tables:



Note the sharp acceleration in Housing costs which accounts for 41% of CPI. It has been rising at a 4.5% annualized rate in Q2, +5.5% in the last 2 months.

So, the inflation jury is still out. Core inflation, however you measure it, continues to rise around a 2% annualized rate, in spite of tepid demand and a rising dollar.

For the Rule of 20, June’s 1.8% inflation rate reduces the Fair P/E to 18.2, from 18.6 in May and 18.9 in April. Based on trailing EPS of $98.35 after Q1’13 results, fair value for the S&P 500 Index is 1790, +6.8% from current levels. This is the lowest level of undervaluation since April 2010. Note how the big rise in equity prices since May 2012 (blue line on chart) has occurred against stalled fair value readings (yellow line) due to flat earnings, resulting in the big decline in equity undervaluation (black line rising towards “20”).



Either earnings, or investors sentiment (QE?) rise smartly, for inflation does not seem about to break down given recent trends in energy prices and shelter costs.

Downside? Fundamentally, renewed fears could take the rule of 20 P/E to 16 which, assuming inflation at +1.8%, would mean a trailing P/E of 14.2. Times $98.35 (?), equals 1400 or –16.5%. technically, the 100 day m.a is at 1598 (-4.6%) and the 200 day m.a. is at 1522 (-9.2%).

U.S. equity markets have not traded at the Rule of 20 fair value since September 2008 (on the down trip) or July 2007 on the uptrend. Are current conditions such that investors have  become fearless?

If Q2 earnings fail to grow…

Real Wages Still Below June 2009 Level

Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession.

Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession.

The flat result stemmed from a 0.4% increase in average hourly earnings being offset by a rise in the consumer price index. Over the last 12 months, inflation-adjusted hourly wages have risen by just 0.4%.

Speaking of shelter costs:


Bay Area Rally Sends Rents Soaring

Rents in the Bay area are getting juiced by a healthy tech sector, exciting investors but riling some tenants.

San Francisco led the top-50 U.S. metropolitan areas in average rent growth during the second quarter, jumping 7.8% to $2,498, while Oakland was No. 2 at a 6.9% increase, and San Jose was in fifth place at 5%. The 6.8% increase for the combined San Francisco Bay area was more than double the nation’s 3.1% increase, according to preliminary estimates by MPF Research, a market-research firm in Carrollton, Texas.

Coke’s Growth Stalled Globally

North American volume slipped for the first time in 13 quarters amid a steep drop in soda consumption (…).

Coke also estimated a stronger dollar will shave 4% off of operating profit this year, up from an earlier 2% forecast.

Coke’s sales volume grew only 1%, slowing from 4% in the first quarter and below Wall Street forecasts of 3% to 4% growth. Revenue dropped 3% to $12.75 billion from $13.09 billion, hurt by the dollar and the sale of its bottling operations in the Philippines.

North American volume slid 1% as a 4% fall in soda sales offset a 5% rise in still beverages. Coke blamed unusually wet and chilly weather in the U.S., including the wettest June in more than 50 years, for the steeper-than-usual drop in soda consumption.

Soda consumption has fallen in North America for eight straight years amid growing obesity and health concerns.

It said tough weather conditions in Europe, including floods and Germany’s coldest spring in four decades, pushed volumes down 4% on that continent, where demand also was hurt by the poor economy and high unemployment.

Elsewhere, in India volumes rose a mere 1% as monsoon rains arrived early, washing out roads and reversing 20% growth in the year-earlier quarter, when the monsoon arrived late.

Weather wasn’t always a factor in certain emerging markets. In Brazil, a source of strong growth in recent years, consumption was flat amid slackening consumer spending and social unrest. Volumes were up just 1% in Mexico, which consumes more Coke products per capita than any other country.

For China, Coke reported flat volume.



NAHB Sentiment Index Hits 7.5 Year High

For the month of July, the NAHB Sentiment survey rose from 51 up to 57.  Even more impressive is the fact that the homebuilder sentiment index has now risen by 13 points in the last two months.  The last time the index saw that big a jump in a two month period was back in February 1992!

The Traffic diffusion Index, though rising, remains below 50.





This morning:

Pointing up  U.S. Housing Starts Fall by 9.9%

Home construction fell sharply in June, highlighting turbulence in the sector as mortgage rates threaten to restrain new activity.

Housing starts declined 9.9% in June from a month earlier to a seasonally adjusted annual rate of 836,000 units, led by a 26% fall in the volatile multi-unit category.

In a report released Wednesday, the Commerce Department said building permits, a measure of future construction activity, fell by 7.5%. That was the sharpest drop in more than two years and was led by a 21% decline in permits for multi-unit buildings.

U.S. Factories Show Pickup in Output U.S. industrial production rose in June as factories built more autos and electronics, a sign that businesses and consumers may be ready to start pulling the economy out of a second-quarter soft patch.

Industrial output increased a seasonally adjusted 0.3% last month and the use of available production capacity inched up 0.1 percentage point to 77.8%, the Federal Reserve said Tuesday.

Manufacturing, the biggest component of industrial production, rose 0.3% in June. Output of automotive products, machinery and home electronics all saw big gains.

The fact is that total output was flat in Q2. (table from Haver Analytics)



China Won’t Have Large Stimulus This Year, Finance Minister Says

Chinese Finance Minister Lou Jiwei said the nation won’t use “large-scale fiscal stimulus” measures this year, adding to signals that the government will tolerate a slowdown in the economy.

China will promote growth and boost employment while fine-tuning policies and keeping the fiscal deficit unchanged, and will also avoid big adjustments to short-term macroeconomic policies, Lou said in July 11 comments in meetings with U.S. officials in Washington. The remarks were posted yesterday on the Finance Ministry’s website.

Lou said in a press briefing at the Washington meetings last week that growth as low as 6.5 percent may be tolerable in the future. While the government in March set a 2013 growth goal of 7.5 percent, Lou said he’s confident 7 percent can be achieved this year.

The official Xinhua News Agency later amended its English-language report on Lou to say there’s no doubt that China can achieve this year’s growth target of 7.5 percent.

Wait, wait:

China’s premier holds the line on reforming economy

China’s Premier Li Keqiang urged caution about rushing to change economic policy to try to revive the country’s sputtering growth, but he also signaled Beijing was prepared to take action if the economy slips too far.

Li was quoted by state television saying late on Tuesday that the government is able to achieve key economic tasks for this year, reinforcing the official view that a 7.5 percent annual economic growth target remains achievable.

“Neither should we change policy orientation due to temporary economic fluctuations, which may affect the hard-won restructuring opportunity, nor should we lack vigilance and preparations when the economy might slide below the reasonable range,” Li was quoted as saying.

Pointing up  FT Alphaville has a great post today:When does a Chinese growth deceleration become a crisis? 

(…) Does that mean an imminent crisis? Does it mean, for example, a financial crisis, outright GDP contraction, or an overthrow of the regime?

We’re not sure.

What is very difficult about China right now is to see past the signs of slowdown and change (liquidity, property markets, precarious WMPs, etc) and connect them to the underlying shifts: the decline of growth led by exports, demographics and most recently, credit-fuelled investment.

If you like, it’s a question of differentiating between symptoms and the cause.

It’s even harder to predict how this will all play out and in what kind of time frame. What we’ve seen recently appears to be the beginnings of the undoings of the most important current tool for both driving growth and creating imbalance — liquidity and credit. (…)

The Q2 GDP number and the associated data suggest the worst of both worlds. Growth is slowing — the number itself looks particularly questionable this quarter — but the rebalancing is not taking place. (…)

The liquidity problems, WMP managers scrambling to cover redemptions, Ordoshaving to borrow money to pay wages — these are symptoms.

They’re serious symptoms. Reuters has a great exploration of how much more volatile and unsettling things could get if/as the authorities pursue the kinds of financial reforms that they’ve already outlined. Jim Chanos argues property price falls could spark middle class unrest and allowing banks more freedom to set lending and deposit rates could mean a scramble to gain deposits. Quartz’s Matt Phillips also looks at the scary implications of China’s capital inflows reversing. Likewise, WMP failures could spark bank runs. (…)

There are of course real constraints on how much longer China’s central government can perpetuate the unbalanced, fast-growth model. Employment is an obvious mechanism for economic slowdown to result in unrest. Yet the ageing population demographic seems to be taking care of that a little earlier than anyone expected. Again, it could change. The ‘employment’ segment of the manufacturing PMIs have been weak for some time. Consumer prices are another — although price controls,strategic pork reserves and the like can probably be deployed to some extent.

Essentially, the point is not so much that ‘China is different’. China can handle many things differently, as its unique approach to growth has already demonstrated. But ultimately, it all ends up being another form of can-kicking. Which, in itself, is not so ‘different’.


NEW$ & VIEW$ (12 JULY 2013)

Wholesale Prices in U.S. Increase More Than Forecast

The 0.8 percent gain in the producer price index was the biggest since September and followed a 0.5 percent rise the prior month, a Labor Department report showed today in Washington. The median estimate in a Bloomberg survey of 73 economists called for a 0.5 percent gain. The so-called core measure, which excludes volatile food and fuel, increased 0.2 percent, also more than forecast.

Compared with the same month a year earlier, companies paid 2.5 percent more for goods, the biggest 12-month increase since March 2012. The core index increased 1.7 percent in the 12 months ended in June, matching the year-over-year gains in the prior three months.

(Doug Short)

Core PPI remains resilient, up 0.9% during the first half, +1.8% annualized. Q2 was +1.6% annualized.

UPS Slashes Guidance Amid “Slowing U.S. Industrial Economy

Citing “customer preference for lower-yielding shipping solutions” – i.e. everyone is slashing costs still, the real kicker is what is driving their revenue and operating income below expectations – “a slowing US industrial economy.”

Euro zone output falls as recovery remains fragile


Industrial production in the 17 countries using the single currency fell 0.3 per cent on the month, following a revised 0.5 per cent increase in April, data from the EU’s statistics office Eurostat showed.

Production in Europe’s two biggest economies, Germany and France, dropped in May, with Italy and Spain showing small increases. Over all, factory output was dented by a 2.3-per-cent drop in the production in durable goods, such as cars and TVs.

Germany, France, and Italy account for two-thirds of the euro zone’s industrial output.

China Credit Weathers Crunch

China’s recent cash crunch—which sent interbank lending rates soaring and roiled stock and bond markets—cut into financing in June but it didn’t result in a cratering of credit during the month

China’s broadest measure of money supply, M2, was up 14% at the end of June compared with a year earlier, below the 15.8% rise at the end of May and below expectations of 15.2%.

Chinese banks extended a total of 860.5 billion yuan ($140 billion) of new yuan loans in June, up from 667.4 billion yuan in May, data from the central bank showed Friday. It was also above market forecasts of 800 billion yuan.

Meanwhile, a broader measure of credit in the banking system known as total social financing came in at 1.04 trillion yuan in June, down moderately from 1.19 trillion yuan in May. While the tally was the lowest monthly total this year, it was still relatively ample.

India Factory-Output Unexpectedly Dips as Inflation Quickens

Production at factories, utilities and mines declined 1.6 percent from a year earlier after a revised 1.9 percent climb in April, the Central Statistical Office said in New Delhi today. The median of 31 estimates in a Bloomberg News survey was for a 1.4 percent gain. Another report showed consumer-price inflation accelerated to 9.87 percent in June.


NEW$ & VIEW$ (11 JULY 2013)

Jobless Claims in U.S. Unexpectedly Rise to Two-Month High

First-time claims rose by 16,000 to 360,000 in the week ended July 6 from a revised 344,000, Labor Department figures showed today in Washington. Claims are difficult to adjust in July for seasonal events such as vehicle plant shutdowns and the Independence Day holiday, a Labor Department spokesman said as the data were released.

The four-week moving average, a less volatile measure than the weekly figures, climbed to 351,750 last week from 345,750.

Fed Affirms Easy-Money Stance

Bernanke sought to reassure markets that officials aren’t abandoning a broader commitment to easy-money policies.

“You can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” he said Wednesday at a conference held by the National Bureau of Economic Research, citing the high unemployment rate, low inflation and “quite restrictive” fiscal policy. He said he expects the Fed won’t raise short-term rates for some time after the unemployment rate hits 6.5%, which would be more than a full percentage point lower than its current level.

The remarks Wednesday came a few hours after minutes of the Fed’s June policy meeting showed officials deeply divided over when to start unwinding the bond-buying program. About half the officials walked into the meeting thinking the central bank might end the program altogether by the end of the year, the minutes showed. (…)

The minutes may count the number of officials who adhere to a particular view, but that obscures the fact that key Fed officials such as Mr. Bernanke, Vice Chairwoman Janet Yellen and New York Fed President William Dudley are still strongly committed to pressing forward with the program, and their views dominate the policy-making process. (…)

Before the meeting, Fed officials submitted projections for the economy and also a description of the outlook for interest rates and the Fed’s bond-buying program that they felt best suited the economic outlook. A summary of these projections described by the Fed in the minutes showed that “about half of these participants indicated that it likely would be appropriate to end asset purchases late this year.” (…)

In short, they have no clue what’s going to happen next on the economy. Not convinced? Read this: Key Passages From Fed Minutes

Mid-June, Bernanke sank stocks, now:

Bernanke Sends Stocks To New All-Time Highs

Pointing up  Meanwhile, market rates are reacting:

Banks Try to Adjust to Rate Surge  A rise in long-term interest rates is creating challenges and opportunities for the largest U.S. banks.

The full percentage-point jump in long-term rates, the sharpest increase since 2010, already has eroded $31 billion in accounting gains from banks’ securities portfolios through late June, according to Federal Reserve data.

At the same time, some bankers said the upward move in long-term rates allows them to raise prices on new commercial loans, an encouraging sign for an industry pummeled in recent years by slim lending margins. Average rates on fixed-rate 10-year commercial loans increased to 3.9% in June from 3.3% in April, according to banking software and data company Automated Financial Systems Inc. (…)

Zions Bancorp, a midsize lender in Salt Lake City with $54 billion in assets, warned investors in a recent presentation what would happen to the industry’s capital if long-term rates were to rise by three percentage points.

The amount of capital held by the industry would drop by $200 billion to $250 billion after taxes, or 17% of the tangible common equity that exists in the banking system, according to the presentation it gave investors at a conference.

That would result in $2 trillion of reduced lending capacity, Zions Investor Relations Director James Abbott said. “We have seen that movie several times,” Mr. Abbott added.

David Zalman, chief executive of Prosperity Bancshares Inc., a midsize lender based in Houston with $16.1 billion in assets, said he anticipates criticism if previous gains in the bank’s $8 billion bond portfolio turn into losses. But over the longer term, “we need rising rates to make more money,” he said.

Some smaller banks already are adjusting their prices. Kevin Cummings, chief executive of the $13 billion-asset Investors Bancorp. Inc. in Short Hills, N.J., said when long-term rates rose, his team decided to increase prices on certain commercial-real-estate and apartment loans.

Lee Roberts, chief operating officer for VantageSouth Bank in Raleigh, N.C., said he noticed rivals Wells Fargo and BB&T Corp. revising prices on certain deals upward and telling clients that existing terms can’t hold for much longer. (…)

Loan “rates are going up,” said Scott Shay, chairman of Signature Bank, an $18.5 billion-asset bank in New York. “If a bank isn’t increasing rates, frankly it is closing its eyes.”

Housing Markets Spurt in Brooklyn, Queens

The shortage of listings and frothy activity reported in the Manhattan market is broadening to communities elsewhere in the city and nearby areas, driving up the price of condos in Long Island City, co-ops in Brooklyn Heights and single family houses in White Plains.


A series of market reports to be released on Thursday paint a picture of a hot market in the region in the second quarter as buyers—including many worried about rising interest rates on mortgages—competed for a shrinking supply of available property. There were also some negatives in the market. Tight credit conditions made it hard for would-be sellers to trade up to larger apartments, shrinking the available supply. (…)

In Brooklyn, the market was so tight that brokers brought in extra staff to handle crowds—of 50 to 60 people in some cases—that have started to show up at open houses, said Frank Percesepe, who oversees Corcoran Group’s operations in Brooklyn.

June has been the most incredible month in the history of Brooklyn sales,” Mr. Percesepe said. He said inventory fell during the second quarter even though the increasing prices had “whet the appetite of sellers” because many new listings were selling quickly. (…)

In Westchester County, Chris Meyers, the managing principal of Houlihan Lawrence, said the quarter was the strongest second period since 2007, and that since then market remained “scorching hot” into the summer. (…)

Pointing up Mr. Meyers said some buyers had locked in interest rates and were rushing to close their deals. He said he expected price increases to moderate because a bump up in interest rates and higher monthly mortgage costs would limit how much some buyers could afford to spend. (…)

Ghost  Should We Be Concerned About These Real Estate Breakdowns?

The rally over the past few years, after the huge declines in Real Estate, has been impressive to say the least. The 4-pack above reflects a variety of leading Real Estate indexes, ETF’s and one stock that is key to home improvements. What do they all have in common? After huge rallies they all formed bearish rising wedges with support lines being broken of late!


…And these turns of events (chart from ISI)?



Prices for U.S. imports and exports fall in June

Export prices fell by 0.1 percent, matching the expectation in a Reuters poll, Labor Department data showed on Thursday.

The drop probably reflects weakness in global demand which has been hit by Europe’s debt crisis and slowing growth in China.

Import prices slipped 0.2 percent last month, dragged down by another month of declining costs outside of the fuels category. Petroleum prices rose 0.2 percent.

Prices for both imports and exports have fallen every month since March, the longest such streak since 2008 when the world was mired in a financial crisis.

BOJ Upgrades Assessment of Economy

Using its most optimistic language in more than two years, the Bank of Japan upgraded its assessment of the economy Thursday, saying it is starting to “recover moderately.” (…)

But speculation for fresh easing measures may surface in the autumn or later, as the central bank slightly lowered its projected inflation figures for the current and following fiscal years and cut its growth forecast for the current fiscal and subsequent two fiscal years.


Auto  China Car Exports Stall

China’s ambition to become an auto export powerhouse like Japan and Germany has hit a speed bump with shipments of domestic brands falling for the last two months in a row.

The country exported 84,400 cars last month, around one-fifth fewer than the same period last year, an auto industry group said on Wednesday. That follows a 16% slump in May—the first year-over-year drop in five years. (…)

June’s export drop was disclosed on the same day that statistics showed a 11% rise in total vehicles sold in China last year, indicating the local market remains solid despite slowing domestic economic growth. (…)

Chinese car makers captured 38% of the country’s passenger-vehicle sales in June, down from 47% at the end of last year. The figures suggest foreign-branded cars continue to dominate the market, pointing to problems for Chinese brands facing a market flush with auto factories.

CLSA auto analyst Scott Laprise said some Chinese car makers had turned to export markets because they struggled to sell their cars at home. The country has about 140 domestic auto makers.

The yuan has gained this year about 20% against the Japanese yen and 10% against the Korean won.


Pointing up  Total auto sales in China reached 1.75 million vehicles in June, while sales of passenger vehicles rose 9.3% to 1.4 million units. In the first half of this year, vehicle sales grew 12% to 10.78 million, and  passenger cars rose 14% to 8.67 million, CAAM said.

China’ Crude-Oil Imports Fell in the First Half

China’s crude-oil imports fell in the first half of 2013, marking the first January-June contraction since 2009, but the second half could see a pickup as refineries emerge from maintenance.

China imported 138 million metric tons, or an average of 5.6 million barrels a day, of crude in the first half of 2013, preliminary data from the General Administration of Customs showed Wednesday. This was 1.4% less than in the first half of 2012.

In contrast, China’s crude imports rose by 7% in the first half of 2011 and 11% in January-June 2012.

Crude imports could accelerate in the third quarter now that some domestic refineries are restarting operations after a period of heavy maintenance, Barclays said Wednesday. (…)

In June, the International Energy Agency predicted that China would use 3.8% more oil this year, while the U.S. government’s Energy Information Administration put China’s oil demand growth at 4.1%. Both the IEA and EIA trimmed their forecasts from ones made earlier in the year.

China relies on imports for around 60% of the oil it uses, and domestic output has remained stagnant for the past few years.

Indonesia Raises Rates as Other Asian Banks Stand Pat

Indonesia’s central bank, caught between rising inflation and weakening growth, raised its main interest rate by a half-percentage point Thursday, while other central banks across Asia stood pat as sluggish exports and a slowdown in China weigh on their economies.

Bank Indonesia had just lowered its growth forecast for the year but said the larger-than-expected rate increase was necessary after last month’s reduction in fuel subsidies drove fuel prices sharply higher. It was the second straight month the bank has raised rates as inflation, which had fallen from a high of 7.02% in January 2011 to a low of 4.57% two years later, again presses upward. (…)

The decision came the same day as central banks in South Korea and Japan held rates steady and lowered their inflation outlooks, while Malaysia’s central bank stayed on hold for a 13th consecutive meeting. The Bank of Thailand held rates steady on Wednesday.

The decisions reflect how Indonesia is increasingly out of step with its neighbors, which are worried about their growth prospects as China’s economy loses momentum and recovery in the West is slow in coming. (…)

Indonesia’s move shows how some countries are more vulnerable to global economic forces like the expected tapering of the U.S. Federal Reserve’s bond-buying program. Indonesia is one of the few countries in the region to run a current-account deficit, which makes it especially sensitive to outflows of foreign capital at a volatile time in global markets.

Money has flowed out of emerging markets since the Fed starting talking in May about scaling back its quantitative-easing program. That knocked the rupiah perilously close to the key level of 10,000 to the dollar, just when Indonesia could have used a stronger currency to damp growing price pressures. (…)

Brazil holds course on inflation fight
Central bank increases benchmark rate by 50bp

The central bank’s monetary policy committee, Copom, increased the benchmark Selic rate by 50 basis points to 8.5 per cent, its third consecutive increase bringing the total rise since it started tightening in April to 125 basis points.

Brazil Signals World’s Biggest Key Rate Rise Far From Over

Brazil’s central bank raised the benchmark interest rate a third consecutive time and said it was giving continuity to the world’s biggest tightening cycle, signaling increases may be extended through year-end as policy makers battle inflation.

Brazil is one of only three countries among 50 major economies tracked by Bloomberg that is raising borrowing costs this year as above-target inflation undercuts months of government stimulus by curbingretail sales growth. After a quarter-point rate increase in April, policy makers in Brazil doubled the pace in May and reiterated warnings that the outlook for inflation remains unfavorable.


NEW$ & VIEW$ (19 JUNE 2013)

Inflation Continues to Undershoot Fed Target  Federal Reserve officials both expect and want inflation to be higher than it is. So far, that isn’t happening.

Consumer price data released Tuesday showed inflation rose a mere 1.4% in May from a year earlier.

But the inflation jury remains out. The seasonally adjusted CPI for all urban consumers rose 0.1% (1.8% annualized rate) in May but the core CPI less food and energy increased 0.2% (2.0% annualized rate) on a seasonally adjusted basis.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.0% annualized rate) in May. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.4%, and the CPI less food and energy rose 1.7%.

Sequentially, core CPI and the median CPI continue to grow at a 2.0% annualized rate. Only the 16% trimmed-mean CPI measure has slowed noticeably during the last 3 months.


Housing Starts Rise 6.8%

Overall housing starts rose 6.8% in May from a month earlier to a seasonally adjusted annual rate of 914,000 units, the Commerce Department said Tuesday. That level was nearly 29% higher from a year ago.

The increase was driven almost entirely by a 24.9% surge in construction of multifamily units, such as apartments, which are benefiting from high demand from many consumers—such as those with weaker credit—opting to rent instead of buy. New starts on single-family homes, meanwhile, rose a slight 0.3%.

Building permits for single-family homes, a measure of future demand, rose by 1.3% last month to the highest level since May 2008.


(Haver Analytics)

I inserted the red circle in Haver’s chart juts to point out that while the media are highlighting the high YoY growth rates, starts are no longer rising sequentially. Permits were pretty good in April and May, however.


Will Home Prices Be Constrained by Stagnant Incomes?

(…) Consider the trends in home prices and incomes since housing’s bottom in 2011. The average new-home price is up about 17%, while per capita income has increased just 2.8% (or about the same pace as inflation). (…)

The constraint will fall harder on adults aged 35 or younger who make up the usual cohort of first-time buyers. They have higher unemployment rates than other adult workers. And many also carry large amounts of student-loan debt.

Bond Investors Head for the Hills

Signs of a stronger U.S. economy are rippling through the bond markets, sending investors and corporate leaders racing to prepare for higher interest rates.

The recent moves show how comments by Federal Reserve Chairman Ben Bernanke and other Fed officials about tapering the central bank’s bond-buying programs already have had a huge impact on the markets. Investors are on tenterhooks hoping for clarity from Mr. Bernanke when he speaks Wednesday at a news conference concluding the two-day meeting of the Federal Open Market Committee. Many investors are looking to his words to determine the scale of further retreats or a rush back into bonds. (…)

If the Fed is clear about its intentions, “we’ll go about the business of this slow but steady recovery,” Mr. Kotok said. “If the Fed fails on Wednesday, you’re in for a shock and more volatility.”

But, will the Fed be right on its economic assessment?


China cash crunch deepens as PBOC stalls
Central bank witholds funding for interbank market

(…) Signalling that the cash crunch could persist for a while, the China Securities Journal, a major state-run newspaper, ran a front-page commentary saying China was at a turning point in monetary policy.

“We cannot use as fast money supply growth as in the past, or even faster, to promote economic growth,” the newspaper said. “This means that authorities must control the pace of money supply growth.”

Stan Druckenmiller On China

Part of a Goldman Sachs interview:

Hugo Scott-Gall: What are the risks of investing in China that are not well understood in your view?

Stan Druckenmiller: The growth in credit at a time when GDP growth is slowing is a problem for China. And I think this is the 2009-11 stimulus coming back to bite. I understand that it had to be done to fund entrepreneurs and the private sector, but it’s easier said than done if you’re channelling funds through local government investment vehicles. I’m a believer in markets. A few men sitting around a table and deciding how to allocate capital goes against everything I’ve ever believed. Not only are they not great at capital allocation, such an exercise also needs to deal with a lack of property rights and corruption.

In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments.

And now, the system’s building enough leverage and misallocation of resources to warrant risks of a financial crisis, but the timing of that is still uncertain in my mind. What we’ve seen in China since 2009 is similar to what happened in the US in 2005, in terms of credit growth outpacing economic growth.

I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.

Pointing up You also need to keep in mind that for China to grow and evolve further, it will need to compete with a more innovative Korea and now a more competitive Japan. I don’t think China can do that with where its exchange rate is today. I think productivity is a key concern too. And I think that could be one of the reasons why the US has been so supportive of Abenomics.

People mention lack of infrastructure as a constraint. But when I go over there, it looks like they have a lot of infrastructure. It seems ahead of the population, not behind. I see expensive apartments in empty cities that 300 mn rural Chinese are expected to migrate to.  That looks very unbalanced to me. Nobody’s ever had investment to GDP at 47%. Japan and Korea peaked at 36%-38%, so as a result I think capacity is way ahead of demand in some areas in China. (…)

And these via John Mauldin’s Outside the Box. Some excerpts but the whole article is fascinating.

    • The demographic challenge is the greatest of all. Here is a bracing forecast: China’s population in 2100 will shrink to 941 million, but the U.S. population will grow to 478 million. Instead of four Chinese to every American, there will be two. As Beardson notes:
    • Societies with steadily falling populations do not normally have a sustained high rate of economic expansion. As China’s population is estimated to peak around 2026 and then to fall, there is a narrowing window for China to continue its high economic growth rates.

    • (…) the solar industry is only the most pronounced example of broader overcapacity in China. Its rise and fall has followed a pattern that is becoming familiar across the world’s second-biggest economy.

    The problems stem from China’s industrial policies and a vast array of subsidies that allow whole sectors to spring up overnight. Ambitious local officials are keen to lavish government money on what they hope will be success stories that can further their careers.

    “When you have administrative measures you get huge overcapacity and this country has created overcapacity in a whole lot of areas,” says Hank Paulson, former US Treasury secretary, who often visits China. “It’s not just clean technologies; steel, shipbuilding we can name all the areas.”

    From chemicals and cement to earthmovers and flatscreen televisions, Chinese industry is awash with excess capacity that is driving down profits inside and outside the country and threatens to further destabilise China’s already shaky growth.

    • In a recent study, Usha and George Haley, US-based academics, studied how Chinese steel, glass, paper and auto parts producers turned from bit players and net importers to the world’s largest manufacturers and exporters in just a couple of years.

    In each of these highly fragmented, capital-intensive industries, labour accounted for between 2 and 7 per cent of costs and the vast majority of companies enjoyed no economies of scope or scale.

    “Our findings contradict the widespread belief that China’s enormous success as an exporting nation derives primarily from low labour costs and deliberate currency undervaluation,” says Usha Haley. “There is enormous overcapacity and no gauging of supply and demand and we found that subsidies account for about 30 per cent of industrial output. Most of the companies we looked at would probably be bankrupt without subsidies.”

    • Another big problem for almost every industry is that companies’ investment and growth plans have been predicated on the belief that the government would never allow growth to drop below 8 or 9 per cent.
    • Today, as growth slips towards 7.5 per cent and lower, China’s new leaders do appear more determined than their predecessors to tackle overcapacity.
    • “We intend to accelerate the transformation of the economic development model and vigorously adjust and optimise the economic structure,” said Zhang Gaoli, the executive vice-premier in charge of the economy and a member of the all-powerful Standing Committee of the politburo, in a speech this month. “We will strictly ban approvals for new projects in industries experiencing overcapacity and resolutely halt construction of projects that violate regulations.”

      However, Beijing has tried for years to tackle this problem but meets fierce resistance from local governments trying to protect their local “seeds”.

Vietnam to Reduce Corporate Income Tax Rate to Help Businesses

The tax rate will be cut to 22 percent from 25 percent starting Jan. 1, 2014, and to 20 percent from Jan. 1, 2016, said National Assembly Vice Chairwoman Nguyen Thi Kim Ngan. The rate for companies with fewer than 200 employees and total revenue of less than 20 billion dong ($950,887) will be lowered to 20 percent from July 1, 2013 and to 17 percent from Jan. 1, 2016.


Pointing up  Ed Yardini warns:

We are a bit surprised by the strength in forward earnings given the recent weakness in S&P 500 forward revenues. We monitor lots of domestic and global economic indicators that are highly correlated with S&P 500 revenues. The y/y growth rates of almost all of them are in the low single digits and seem to be heading toward zero. For example, US manufacturing and trade sales rose just 1.5% y/y during April.