NEW$ & VIEW$ (24 JANUARY 2014)

No Recession In Sight:Conference Board Leading Economic Index Edged Up in December

The index rose to 0.1 percent to 99.4 percent from the previous month’s 99.3 (2004 = 100). This month’s gain was mostly driven by positive contributions from financial components. In the six-month period ending December 2013, the leading economic index increased 3.4 percent (about a 7.0 percent annual rate), much faster than the growth of 1.9 percent (about a 3.9 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than the weaknesses.

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Chicago Fed: Economic Growth Moderated in December

Led by declines in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.16 in December from +0.69 in November. Three of the four broad categories of indicators that make up the index decreased from November, although three of the four categories also made positive contributions to the index in December.

The index’s three-month moving average, CFNAI-MA3, edged down to +0.33 in December from +0.36 in November, marking its fourth consecutive reading above zero. December’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index ticked down to +0.38 in December from +0.40 in November. Forty-seven of the 85 individual indicators made positive contributions to the CFNAI in December, while 38 made negative contributions. Twenty-seven indicators improved from November to December, while 56 indicators deteriorated and two were unchanged. Of the indicators that improved, seven made negative contributions.

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HOUSING WATCH

Existing Home Sales Approach a New Normal

Sales increased 1.0% in December, to an annual rate of 4.87 million, below economists’ expectations, and the November sales pace was revised down to 4.82 million.

But the year-end weakness wasn’t enough to stop the year from being the best for resales in years. Sales totaled just over 5 million last year, “the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom,” said the National Association of Realtors that compiles the existing home data.

A sales pace of five million homes looks more sustainable. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population,” said Lawrence Yun, NAR chief economist.

CalculatedRisk adds:

The key story in the NAR release this morning was that inventory was only up 1.6% year-over-year in December. The year-over-year inventory increase for November was revised down to 3.0% (from 5.0%).

 

Pointing up All-cash sales jump as “normal” buyers go on strike. RealtyTrac reports:

All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from a revised 38.1 percent in November, and up from 18.0 percent in December 2012.

States where all-cash sales accounted for more than 50 percent of all residential sales in December included Florida (62.5 percent), Wisconsin (59.8 percent), Alabama (55.7 percent), South Carolina (51.3 percent), and Georgia (51.3 percent).

Institutional investor purchases (comprised of entities that purchased at least 10 properties in a year) accounted for 7.9 percent of all U.S. residential sales in December, up from 7.2 percent the previous month and up from 7.8 percent in December 2012.

Metro areas with the highest percentages of institutional investor purchases in December included Jacksonville, Fla., (38.7 percent), Knoxville, Tenn., (31.9 percent), Atlanta (25.2 percent), Cape Coral-Fort Myers, Fla. (24.9 percent), Cincinnati (19.3 percent), and Las Vegas (18.2 percent).

For all of 2013, institutional investor purchases accounted for 7.3 percent of all U.S. residential property purchases, up from 5.8 percent in 2012 and 5.1 percent in 2011.

 

Not a sign of a healthy market, is it? Meanwhile,

Framing Lumber Prices: Moving on Up

 

 

The faith may well be strong, the means are simply not there:image image

Also: Gundlach Counting Rotting Homes Makes Subprime Bear

 

GE’s Rice Sees Global Growth

General Electric vice chairman John G. Rice said that the global economy “was getting better, not worse,” and that beneath lower growth expectations for emerging markets “there was tremendous underlying demand for infrastructure.”

Investors Flee Developing Countries

Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

The Argentinian peso tumbled more than 15% against the dollar in early trading as the South American nation’s central bank stepped back from its efforts to protect the currency, forcing the bank to reverse course to stem the slide. The Turkish lira sank to a record low against the dollar for a ninth straight day. The Russian ruble and South African rand hit multiyear lows. (…)

Countries with similar current-account deficits considered especially fragile by investors include Brazil, South Africa, India and Indonesia. But the emerging-markets tumult hasn’t hit the “contagion” stage of across-the-board, fear-driven selling of all emerging economies. Indonesia’s rupiah and India’s rupee, for example, advanced against the dollar Thursday, benefiting from those countries’ efforts to adjust their policies to support their currencies.

And this little nugget:

Art Cashin, who runs UBS’s operations on the floor of the New York Stock Exchange, picked up on this in a mid-afternoon note to clients. “China Beige Book has a sentence that translates into English as ‘credit transmission is broken,’ ” he wrote. “That suggests the current credit squeeze may be far more complicated than Lunar New Year drawdowns.” (WSJ)

BOE’s Carney Suggests Falling Unemployment Doesn’t Mean Rates Will Rise Bank of England Gov. Carney said the U.K. central bank will look at a broad range of economic factors when assessing the need for higher interest rates, a sign that officials may be preparing to play down the link between BOE policy and falling unemployment.

imageBoE signals scrapping of forward guidance Carney flags dropping of 7% jobless threshold

(…) Mr Carney made it clear in the interview that there was “no immediate need to increase interest rates” but said the economy was now “in a different place” to the time he introduced guidance. Then, he said, the concern was that the UK economy was stagnating and might contract again: now the concern is that rapid growth might need action by the BoE to make it more sustainable. (…)

Punch If this is not clear guidance, what is? FYI, here’s the situation in the U.S.:

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Google chief warns of IT threat
Range of jobs in danger of being wiped out, says Schmidt

 

(…) Mr Schmidt’s comments follow warnings from some economists that the spread of information technology is starting to have a deeper impact than previous periods of technological change and may have a permanent impact on employment levels.

Google itself, which has 46,000 employees, has placed big bets on automation over some existing forms of human labour, with a series of acquisitions of robot start-ups late last year. Its high-profile work on driverless cars has also led to a race in the automobile industry to create vehicles that can operate without humans, adding to concerns that some classes of manual labour once thought to be beyond the reach of machines might eventually be automated.

Recent advances in artificial intelligence and mobile communications have also fuelled fears that whole classes of clerical and research jobs may also be replaced by machines. While such upheaval has been made up for in the past by new types of work created by advancing technology, some economists have warned that the current pace of change is too fast for employment levels to adapt. (…)

“There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out,” he said. The auto industry was an example of robots being able to produce higher quality products, he added.

New technologies were creating “lots of part-time work and growth in caring and creative industries . . . [but] the problem is that the middle class jobs are being replaced by service jobs,” the Google chairman said. (…)

Shale Boom Forces Pemex’s Hand

For decades, Mexico’s state oil company, Petróleos Mexicanos, had the best customer an oil company could want: the U.S. But now the U.S. energy boom is curtailing the country’s demand for imported oil, and Pemex is being forced to look farther afield.

For the first time, the company is negotiating to sell its extra-light Olmeca crude oil in Europe, according to Pemex officials. The first shipment will go out in the second half of February to the Cressier refinery in Switzerland, the company said.

The change is one of many in the North American energy landscape affecting Pemex, which also faces competition in exploration and production as Mexico prepares to allow foreign oil companies back into the country for the first time in 75 years. (…)

 
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NEW$ & VIEW$ (26 DECEMBER 2013)

Signs Point to Stronger Economy

A pickup in business investment and robust new-home sales point to an economy on stronger footing as the year winds to a close.

(…) Orders for U.S. durable goods rose 3.5% last month, reversing a decline in October, the Commerce Department said Tuesday. Excluding the volatile transportation category, manufactured-goods orders rose 1.2%, the strongest gain since May.

Meanwhile, Americans continued to purchase new homes at a brisk pace in November, the Commerce Department said in a separate report this week, the latest sign the housing market is regaining traction after a rise in mortgage rates. New-home sales hit a seasonally adjusted annual rate of 464,000 last month, down only 2.1% from October’s upwardly revised annual rate of 474,000. October and November marked the two strongest months of new-home sales since mid-2008.

The pair of reports showed renewed optimism by businesses and prospective homeowners, two of the biggest drivers of the economy, and led Macroeconomic Advisers to raise its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate.

The overall durable-goods increase was driven by business investment, particularly in civilian aircraft orders, which rose nearly 22%. But a broader measure of business spending on software and equipment rose at a solid pace in November after falling in recent months. Orders for nondefense capital goods, excluding aircraft, increased by 4.5%, its strongest pace since January. That could be a sign businesses stepped up spending after the partial government shutdown in October. (Chart and table from Haver Analytics)

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U.S. Consumer Spending Up 0.5% in November

Americans stepped up their spending in November, boding well for holiday sales and offering the latest sign the U.S. recovery is gaining momentum.

Personal consumption, reflecting what consumers spend on everything from televisions to health care, climbed 0.5% in November from a month earlier, the fastest pace since June, the Commerce Department said Monday. The gain was driven by a boost in spending on big-ticket items, more than half of which came from automobile and parts buying, and on services.

But tepid income growth could limit future gains. Personal income increased 0.2% in November after falling 0.1% in October. As a result, consumers dipped into their savings to maintain their spending. (…)

cat

The price index for personal consumption expenditures, the Federal Reserve’s preferred gauge for inflation, was flat in November from a month earlier, the second consecutive month prices went unchanged. From a year earlier, prices were up 0.9% in November, after being up 0.7% in October.

Core prices, which exclude volatile food and energy costs, rose 0.1% from October and 1.1% from a year prior.

Nerd smile What’s wrong with this chart?

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Personal income gained a disappointing 0.2% (2.3% y/y) after a minimal dip in October. Disposable personal income increased just 0.1% (1.5% y/y), held back by a 0.8% rise (9.0% y/y) in tax payments. Wages & salaries increased 0.4% but the 2.2% year-to-year increase was the weakest since mid-2010.

Real disposable income rose 0.3% during the last 3 months, a very weak 1.2% annualized rate that lead to a very low 0.6% YoY increase in November. Meanwhile, real expenditures rose 1.1%, a 4.5% annualized rate. November real spending was up 2.6% YoY. Americans just keep dissaving to sustain their living standard. For how long?

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Meanwhile, Christmas sales are fuzzy:

This chart plots weekly chain store sales which have been in a narrow +2.0-2.3% YoY gain channel since the spring. Weak!

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But Online Sales Jumped 37% During Weekend

(…) After mall-traffic tracker ShopperTrak on Monday reported a 3.1% decline in holiday in-store sales and a 21% plunge in store traffic in the crucial shopping week ended Sunday, additional data again suggest a much brighter picture online. Total online sales from Friday through Sunday surged 37% year-to-year, with mobile traffic representing two-fifths of all online traffic, according to IBM Digital Analytics. Consumers buying from their mobile devices sent mobile sales up 53%, accounting for 21.5% of all online sales, IBM said. (…)

Sad smile With what looks to be a disappointing holiday season, Retail Metrics’ Ken Perkins said Tuesday that fourth-quarter retail sales for the 120 chains it tracks is now expected to rise just an average of 1.9%, the weakest since third-quarter 2009. Profit growth is expected to be just 1.3%, also the weakest since third-quarter 2009, “when retailers were still clawing their way out of the Great Recession.”

Fourth-quarter same-store sales are expected to rise an unimpressive 1.1%.

“It has been a very disappointing holiday season to date for most of retail,” said Mr. Perkins.

Late Surge in Web Buying Blindsides UPS, Retailers A surge in online shopping this holiday season left stores breaking promises to deliver packages by Christmas, suggesting that retailers and shipping companies still haven’t fully figured out consumers’ buying patterns in the Internet era.

(…) E-commerce accounts for about 6% of overall U.S. retail sales, according to the Commerce Department. This holiday season, online purchases will be nearly 14% of sales, estimates the National Retail Federation.

During the last shopping weekend before Christmas, Web sales jumped 37% from the year before, according to IBM Digital Analytics. Market research firm Forrester Research expects online sales to increase 15% this holiday season amid slow mall traffic and weak sales at brick-and-mortar retailers.

Coming back to the slow income growth trends:

 

Mortgage Applications Drop to 13-Year Low

The average number of mortgage applications slipped 6.3% to a 13-year low on a seasonally adjusted basis as interest rates rose from the previous week, the Mortgage Bankers Association said.

Following last week’s 6.1% drop, applications for purchase mortgages were down another 3.5% w/w to the lowest level since February 2012. The purchase index is currently tracking down 11.5% y/y. (…)  Application activity remains below both the recently reported y/y growth in new home sales (+22% in October) and existing home sales (-1.2% in November), led by a declining mix of first-time buyers within both segments. Recent data also suggests mortgage credit availability has tightened slightly more. (…)

The average contract rate on 30-year fixed conforming mortgages increased 2 bp w/w to 4.64%, matching the highest level since September, and is now up 105 bp since bottoming during the week ended May 3. Overall mortgage rates are up 113 bp y/y, as the spread relative to the 10-year Treasury note has now expanded 1 bp y/y to 175 bp.

BTW, FYI:

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Calm returns to China’s money markets Central bank skips open market operations

China Expects 7.6% Growth in 2013 China’s economy will post growth of 7.6% for all of 2013, a top planning official said, indicating that the world’s second-largest economy will exceed Beijing’s 7.5% target but that it also lost momentum in the final months of the year.

(…) China’s economy posted year-over-year growth of 7.8% in the third quarter after expanding at 7.7% in the first quarter and 7.5% in the second quarter amid a still sluggish global economy. A “mini-stimulus” of government investment in rail and subway construction coupled with tax and other business incentives helped boost growth in the July-September period. (…)

Ninja I suspect the Chinese are spying on NTU which revealed the Q4 slowdown on Dec. 18.

Christmas spirit does little for Spain
Subdued domestic demand weighs on the economy

(…) Retail sales are still a quarter lower than they were before Spain slid into economic crisis more than five years ago, and some shop owners say they have seen little change in consumer behaviour so far. (…)

Until now, the recovery has been driven almost exclusively by rising exports, with domestic demand acting as a drag on growth. The surge in shipments to foreign markets was sufficiently strong to lift Spain out of recession in the third quarter this year, and has given companies the confidence to start investing in plants and machinery. But economists warn that Spain will be stuck with anaemic growth at best as long as domestic demand remains as subdued as it is now.

There are some signs of hope. According to the Bank of Spain, the decline in overall household consumption slowed in the third quarter. Spanish retail sales actually rose 2.1 per cent on an annual basis in September, the first such increase in more than three years, but fell back into negative territory the next month. Consumer confidence has risen sharply and car sales – helped by a government subsidy programme – are also up.

Javier Millán-Astray, director-general of Spain’s association of department stores and retail chains, notes that sales on the first big shopping weekend of the holiday season were up 8 per cent compared with last year, and predicts an overall rise in Christmas sales of 6-7 per cent compared with 2012. “We have seen a change in the trend since August. Sales have still been falling but the drops are much smaller than before. And the truth is that the first weekend of the Christmas season was much better than the year before.” (…)

 
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NEW$ & VIEW$ (20 DECEMBER 2013)

The Fed is actively engaged in a communication blitz to convince investors that tapering is no big deal.

Fed’s Mortgage Role Expands The central bank’s asset purchases are a bigger share of the market as it begins to taper its bond-buying program.

(…) Because bond production has tumbled, the Fed’s share of total mortgage-bond purchases has risen significantly over the past three months.

The Fed bought about 90% of new, eligible mortgage-bond issuance in November, up from roughly two-thirds of such bonds earlier this year, according to data from J.P. Morgan Chase & Co. The Fed’s large role in the mortgage market means that even as it reduces its bond purchases, the market could enjoy considerable support from the central bank in the near term.

Well, we’ll see how things go as the elephant in the room is trying to back up through the front door.

Mortgage rates stood at 4.6% last week for the average 30-year, fixed-rate mortgage, according to the Mortgage Bankers Association. Rates had been as low as 3.6% in May.

The yield on the 10-year Treasury note, a key driver of trading in mortgage markets, hit a three-month high Thursday at 2.923%. (…)

The Fed’s plan to purchase at least $35 billion in mortgage securities in January compares with market-wide net mortgage-bond issuance of about $18 billion a month in recent months, said Mr. Jozoff. (…)

Despite taking initial steps to reduce its asset purchases, the Fed “will be still expanding our holdings of longer-term securities at a rapid pace,” said Federal Reserve Chairman Ben Bernanke at a news conference on Wednesday. “We’re not doing less,” Mr. Bernanke said. “I would dispute the idea that we’re not providing a lot of accommodation to the economy.” (…)

Mortgage applications fell to a 13-year low last week, a sign that mortgage volumes could remain low for now. (…)

Even Markit plays the Fed’s tune: Fed tapers as outlook improves, removing one more global economic uncertainty

Something that many overlooked – especially back in May, when talk of taper first appeared – is that the taper is not a tightening policy. It is merely a reduction in the pace at which the central bank is pumping money in to the financial markets. That total, which has been growing at $85bn every month since the Fed embarked on its third wave of Quantitative easing 15 months ago, will instead grow by $75bn per month from January onwards.

Ask any junky what happens during tapering (see Withdrawal Syndrom)

Remember, we are all parts of this huge experiment.

By the way:

 

  • U.S. Existing Home Sales Down 4.3% Sales of previously owned homes slipped to the lowest level in nearly a year in November, signaling that higher mortgage rates are making buyers wary.

Existing-home sales decreased 4.3% from the prior month to a seasonally adjusted annual rate of 4.9 million, the National Association of Realtors said Thursday. Home sales fell by 1.2% from a year earlier, the first time in 29 months the year-over-year figure declined. (Chart from ZeroHedge)

  • From National Bank Financial:

The US housing market is facing some headwinds as evidenced by existing home sales which, in November, fell to the lowest since late 2012. The slump shouldn’t be entirely surprising considering the decline in
mortgage loans, the latter on pace to contract in Q4 at the fastest pace since 2011. Rising long rates partly explain why mortgage loans are drying up, but bad credit among one important segment of the population can also be having a detrimental effect.

Indeed the youth seem to be finding it difficult to qualify for loans
due to the lack of job opportunities but also due to bad credit. Note the disproportionate increase in student loan delinquencies in recent years.

And as today’s Hot Charts show, that may explain why the homeownership rate among the youth has dropped in recent years at a faster pace than that of any other age segment. So, barring new government measures to help address student debt and delinquencies, it may take longer for the housing market to fully recover from the crash that triggered the Great Recession. That’s one of the reasons why we expect home price inflation in 2014 to moderate somewhat from this year’s hot pace.

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Currently, the U.S. economy is forming just over 400,000 new households per year as of the third quarter of 2013, significantly below the long-term average of just under 1.2 million. Given current population growth, America should be forming roughly 1 million new households each year.

However, the latest recession was so severe that it continues to suppress household formation. One piece of evidence: A growing percentage of young adults aged 18-34 are living with their parents. (…) We believe the “American Dream” of home ownership is intact and note the recent uptick in the home ownership rate as evidence of pent-up demand and an improving outlook for household formation given rising wealth and stronger job creation.

Kiesel just forgot to mention that rising wealth may not be reaching the 18-34 cohort just yet, while rising mortgage rates and restrictive credit scores are.

Philly Fed Weaker Than Expected

Just one day after the Fed announced a $10 billion taper to its monthly asset purchase program, the economic data has not been very good.  Of the five economic indicators released on Thursday, four came in weaker than expected.  One of those indicators was the Philly Fed report.  While economists were expecting the headline reading to come in at a level of 10, the actual reading was 7.0, which represented a slight increase from November’s reading of 6.5.

As shown, four of the nine components declined this month, led lower by Delivery Time and Prices Paid. The decline in Prices Paid should be a good sign for the Fed as it implies that inflation pressures remain contained.  On the upside, we saw the greatest improvement in Average Workweek and Shipments.  All in all, this morning’s report was pretty much neutral, but with a string of weaker than expected economic data just one day after the ‘taper’ was announced, one wonders if anyone at the Fed is beginning to have second thoughts.

High five Slight oversight by Bespoke: New Orders remain strong.

Jobless Claims Highest Since March

Jobless claims came in significantly higher than expected for the second straight week today (379K vs. 334K).  This week’s reading exceeded the spike we saw during the government shutdown and was the highest reading since March.  While the BLS blamed normal seasonal volatility, if the seasonality was so ‘normal’ why was it unexpected?  While last week’s rise was written off as a one off, two weeks is a little more notable.

After the increases of the last two weeks, the four-week moving average rose to 343.5K.  If the elevated levels of the last two weeks continue, it will start showing up more in this figure and that would be troubling especially given the Fed’s timing of the taper yesterday.

Conference Board Leading Economic Index: Fifth Month of Growth
 

The Conference Board LEI for the U.S. increased for the fifth consecutive month in November. Positive contributions from the yield spread, initial claims for unemployment insurance (inverted), and ISM® new orders more than offset negative contributions from consumer expectations for business conditions and building permits. In the six-month period ending November 2013, the leading economic index increased 3.1 percent (about a 6.4 percent annual rate), faster than the growth of 2.0 percent (about a 4.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

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No recession in sight. Thumbs up

China cash injection fails to calm lenders
Stocks slide as money market rates stay dangerously high

An emergency cash injection by the Chinese central bank failed to calm the country’s lenders as money market rates climbed to dangerously high levels.

Analysts cited a variety of technical factors for the tightness in the Chinese financial system, but the sudden run-up in rates was an uncomfortable echo of a cash crunch that rattled global markets earlier this year.

Concerns focused on the rates at which Chinese banks lend to each other. The seven-day bond repurchase rate, a key gauge of short-term liquidity, was emblematic of their reluctance to part with cash. It averaged 7.6 per cent in morning trading on Friday, its highest since the crunch that hit China in late June. That was up 100 basis points from Thursday and far above the 4.3 per cent level at which it traded just a week ago.

The sharp increase occurred despite the central bank’s highly unusual decision to conduct a “short-term liquidity operation” on Thursday, providing a shot of credit to lenders struggling for cash. In a clear sign of its concern at the stress in financial markets, the People’s Bank of China used its account on Weibo, China’s version of Twitter, to announce the SLO. According to the central bank’s own rules, it is only supposed to confirm SLOs one month after completing them.

The China Business News, a state-owned financial newspaper, reported that the short-term injection was worth Rmb200bn ($33bn), a large amount. But traders blamed the central bank for letting market conditions deteriorate to the point of needing an emergency injection in the first place. The PBoC steadfastly refused to add liquidity to the market in recent weeks despite the banking system’s regular year-end scramble for cash.

Pointing up Lu Ting, an economist with Bank of America Merrill Lynch, said China’s financial system was entering a new era and policy makers were struggling to adapt. “The PBoC is faced with some serious challenges . . . and is confused,” he said. “The PBoC finds it much more likely than before to make [operational] mistakes.”

Mr Lu said he was confident that China would avoid a full-fledged repeat of June’s cash crunch because the central bank did not want to see an over-tightening of monetary conditions. Rather, he and other analysts said the PBoC appeared to have misjudged the flow of funds in the economy. (…)

 
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NEW$ & VIEW$ (19 DECEMBER 2013)

Fed Slows Bond Buying 

Ben Bernanke gave the U.S. economy a nod of approval just a month before he leaves the Federal Reserve, moving the central bank to begin winding down a bond-buying program meant to boost growth with the recovery on firmer footing.

“Today’s policy actions reflect the [Fed's] assessment that the economy is continuing to make progress, but that it also has much farther to travel before conditions can be judged normal,” Mr. Bernanke said.

After months of wringing their hands about the implications of less Fed stimulus, investors resoundingly approved of the latest action to begin paring the $85 billion-a-month program. They were cheered in part because the move came with new Fed assurances that short-term interest rates would stay low long after the bond-buying program ends. (…)

The Fed, which launched the latest round of bond buying in September 2012 in a bid to fire up the tepid recovery, will now buy $75 billion a month in mortgage and Treasury bonds as of January, down from $85 billion. That will include $35 billion monthly of mortgage securities and $40 billion of Treasurys, $5 billion less of each. It will look to cut the monthly amount of its purchases in $10 billion increments at subsequent meetings, Mr. Bernanke said.

Although the Fed expects to keep reducing the program “in measured steps” next year, the timing and the course isn’t preset. “Continued progress [in the economy] is by no means certain,” Mr. Bernanke said. “The steps that we take will be data-dependent.”

If the Fed proceeds at the pace he set out, it would complete the bond-buying program toward the end of 2014 with holdings of nearly $4.5 trillion in bonds, loans and other assets, nearly six times as large as the Fed’s total holdings when the financial crisis started in 2008. (…)

The Fed has said it wouldn’t raise short-term rates, which are now near zero, until the jobless rate gets to 6.5% or lower. (…)

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials who participated in the policy meeting said they expected their benchmark short-term rate to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016. (…)

But What About Inflation

Barry Eichengreen Taper in a teapot (The writer is professor of economics and political science at the University of California, Berkeley)

(…) But these changes are inconsequential by the standards of the dramatic and unprecedented developments in monetary policy that we have seen since 2008; $10bn of monthly securities purchases are a drop in the bucket for a central bank with a $4tn balance sheet. Even if this month’s $10bn reduction is the first in a series of successive monthly steps in the same direction, it will take many months before the change has discernible impact on the Fed’s financial statement.

Wall Street may have had some trouble figuring this out on Wednesday afternoon, when the Fed’s statement seemingly threw the markets into a tizzy. But given a night’s sleep, stock traders should be able to recognise the Fed’s announcement for the non-event that it is. (…)

The value of this week’s FOMC decision is mainly symbolic. It is a way for the Fed to signal to its detractors that it hears their criticisms of its unconventional monetary policies, and that it shares their desire to return to business as usual. The decision beats back some of the criticism to which the Fed is subject and diminishes prospective threats to its independence. But, at the same time, the central bank has also signalled that it is not prepared to return to normal monetary policy until a normal economy has returned. As Hippocrates would have said, it has at least done no harm.

The Fed’s Shifting Unemployment Guideposts

Dec. 12, 2012. In an effort to bolster confidence, the Fed pledged to keep its interest-rate target low “at least as long as the unemployment rate remains above 6.5%” and inflation remained under control.

June 19, 2013. In a press conference, Fed Chairman Ben Bernanke qualified the 6.5% target, calling it a “threshold, not a trigger,” at which point the Fed would begin to “look at whether an increase in rates is appropriate.” But then the chairman offered a new guidepost, this one for the central bank’s bond-buying program. “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%,” Mr. Bernanke said. (Unemployment reached that point last month.)

Sep. 18, 2013. A surprise decline in the unemployment rate despite relatively weak economic growth forced Mr. Bernanke to back away from the new 7% target at his very next press conference. “The unemployment rate is not necessarily a great measure, in all circumstances, of the state of the labor market overall,” Mr. Bernanke said, noting the recent decline was primarily the result of people leaving the workforce, not finding jobs. “There is not any magic number that we are shooting for,” he said. “We’re looking for overall improvement in the labor market.”

Dec. 18, 2013. As the fall in the unemployment rate continues to outpace improvement in the broader economy, the Fed decides to sever the link to short-term interest rates almost entirely. “It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%,” the Fed said in its statement following its latest meeting. In his press conference, Mr. Bernanke said the Fed will be looking at other gauges of labor-market health. “So I expect there will be some time past the 6.5% level before all of the other variables we’ll be looking at will line up in a way that will” give the central bank the confidence to raise rates.

Firm, but flexible…

But with the Fed projecting that the output gap will narrow, inflation will edge up, and unemployment will fall in the years ahead, even these more liberal Taylor rules suggest the Fed should be ratcheting up rates faster than it says it will. Indeed, Fed officials’ median projection is for the target rate to have risen to just 1.75% by the end of 2016; typical Taylor rules would prescribe over 3%. (WSJ)

For the record, here are the FOMC projections and how they have “evolved” since June 2013, courtesy of CalculatedRisk:

  • On the projections, GDP was mostly unrevised, the unemployment rate was revised down slightly, and inflation was revised down.

imageProjections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

  • The unemployment rate was at 7.0% in November.

imageProjections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

  • The FOMC believes inflation will stay significantly below target.

image

  • Here is core inflation:

image

Nerd smile  The only “significant changes since June are in the unemployment rate projections. Everything else is somewhat weaker. So much for an “economy that is continuing to make progress”.

Fingers crossed  WARNING: Another Soft Patch Ahead? (Ed Yardeni)

Businesses are building their inventories of merchandise and new homes. That activity boosted real GDP during Q3, and may be doing it again during the current quarter. The question is whether some of this restocking is voluntary or involuntary.

The recent weakness in producer and consumer prices suggests that some of it is attributable to slower-than-expected sales. To move the merchandise, producers and distributors are offering discounts. November’s surge in housing starts may also be outpacing demand, as evidenced by weak mortgage applications.

In other words, the rebound in the Citigroup Economic Surprise Index over the past 10 days might not be sustainable into the start of next year. I’m not turning pessimistic about the outlook for 2014. I am just raising a warning flag given the remarkable increase in inventories recently and weakness in pricing.

I have been warning about this possible inventory cycle. See Ford’s warning below.

U.S. Home Building Hits Highest Level in Nearly 6 Years

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the highest level in nearly six years, in the latest sign of renewed momentum in the sector’s recovery.

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the Commerce Department said Wednesday. That was higher than the 952,000 forecast by economists and brought the average pace of starts for the past three months to 951,000.

Details of the report showed broad strength for housing. Starts for single-family homes, a bigger and more stable segment of the market, also rose to their highest level in nearly six years.

November building permits, an indicator of future construction, fell slightly to the still-elevated level of 1,007,000. Permits had jumped 6.7% in October.

The report showed home building returning to the brisk pace seen early this year, before the sector’s recovery took a hit from rising interest rates. Builders broke ground on an average 869,000 homes between June and August.

 

 

Mobile homes are also moving:

 

RV Sales Rebound as U.S. Economy Improves

(…) More Americans are taking to the road in recreational vehicles as sales of towable campers approach pre-recession levels and shipments of motorized models gain speed. The total for all new units sold this year is projected to rise about 11 percent from last year to 316,300, Walworth said. Meanwhile, 2014 looks like “another good year,” as sales could top 335,000, the most in six years. (…)

More than four years since the 18-month recession ended in June 2009, sales of these units — with an entry-level price of about $80,000 — are up more than 30 percent from last year, he said, citing data from the Recreation Vehicle Industry Association, a trade group. Meanwhile, towable units — retailing for as little as $4,000 — have risen 8.5 percent. (…)

It’s useful for investors to monitor this industry because it’s proven to be “fantastic as a leading indicator of overall economic trends,” said Kathryn Thompson, a founder and analyst at Thompson Research Group in Nashville, Tennessee. Sales began to drop as interest rates climbed into 2006; the yield on 10-year Treasuries reached 5.24 percent in June of that year. By December, “the consumer was completely falling apart in the RV industry.”

That slump came one year before the U.S. entered the worst recession in more than 70 years. Now traffic at dealerships nationwide probably will be even better in 2014, Thompson said, adding that “very strong” sales have helped drive towable units near the pre-recession peak. (…)

EARNINGS WATCH

 

FedEx Bolsters Full-Year Forecast

FedEx Corp. said a shorter holiday shipping season stunted growth in its ground division, but the package-delivery company bolstered its full-year guidance and said it expects an improved financial performance next quarter.

Profit rose 14% to $500 million for the company’s fiscal second quarter ended Nov. 30, up from $438 million in the same period a year earlier. Per-share profit totalled $1.57 for the most recent quarter, less than the $1.64 that analysts surveyed by Thomson Reuters had expected.

Cyber Monday, one of the year’s busiest online-shopping days, fell on Dec. 2 this holiday season instead of in November, damping expected growth and keeping ground-business profits from reaching as high as analysts had predicted, FedEx said. The company added that its results were affected by costs associated with the expansion of its ground network. (…)

It seems that just about everybody was surprised that Cyber Monday occurred Dec. 2nd this year…But no worry, buybacks will save the year.

FedEx, based in Memphis, Tenn., indicated that it is poised for strong growth in the current quarter. Chief Executive Frederick W. Smith said FedEx’s 22 million shipments on Dec. 16 marked its third-straight record Monday this month.

The company increased its outlook for full-year earnings-per-share growth to a range of 8% to 14% above last year’s adjusted results, up from 7% to 13% previously, in part because of the effects from its share-buyback program announced in October.

Auto  Ford Warns on Earnings Growth

Ford Motor Co. warned on Wednesday its 2014 profits won’t match this year’s results because of higher costs and a currency devaluation. And it said it likely won’t meet operating profit projections of between 8% and 9% of sales by 2015 or 2016. That goal is “at risk” because of the recession in Europe and weaker results in South America. (…)

In the U.S., it blamed competition from Japanese rivals for a decision earlier this month to temporarily idle U.S. factories that build the midsize Fusion and the compact Focus to reduce inventories. The shutdowns came less than four months after Ford expanded Fusion output, citing a shortage of the cars. It also was hurt by warranty costs for Escape engine repairs. (…)

Sounds more like poor production planning leading to excess inventory, just as the Japs are benefitting from their weak Yen. What about GM and Chrysler?

GM executives also say ambitious new product programs will be vital to sustaining profitability in the next few years. “You’ve got to protect your product and you got to protect your cash flow and you have got to invest in the future,” GM CEO Akerson said earlier this week. “That may mean short-term disruptions in other priorities.”

Hmmm…”You’ve got to protect…” Sounds like a warning to me.

(…) However, the recent decline in the value of the Japanese yen against the dollar gives Toyota, Honda and Nissan more latitude to cut prices. All three have aggressive holiday promotions, a sign they want to regain market share lost after the 2011 tsunami and a period of yen strength. (…)

Which leads to

Surprised smile McDonald’s Japan slashes profit forecast by nearly 60%
Battered yen raises costs for the Japanese affiliate of the US fast-food giant

(…) It’s now forecasting net profit of Y5bn, down from Y11.7bn, according to a statement to the Tokyo Stock Exchange. Analysts had been looking for Y9.5bn in profit, according a Bloomberg poll.

The profit warning follows a Nov 7 earnings report that revealed net income had dropped 36 per cent from a year earlier in the third quarter.

Even after the Nov. 7 release, estimates remained 60% too high! Sleepy smile

McDonald’s Corp, which owns 50 per cent of the Japanese fast-food chain, doesn’t break out Japan in its earnings results but calls it is one of six “major markets” alongside the UK, France, China, Australia and the US, which together accounted for 70 per cent of revenues last fiscal year.

Jabil Circuit Warns, Stock Sinks

Shares of Apple Inc. AAPL -0.76% supplier Jabil Circuit Inc. JBL -20.54% fell more than 20% Wednesday after the components maker said an unanticipated drop in demand from a big customer would hurt revenue and profit in the current quarter.

Jabil’s warning raised concerns about sales of Apple’s iPhone 5C, a less-expensive model that Apple released in September. Apple is Jabil’s biggest customer, accounting for 19% of its revenue in the fiscal year ended Aug. 31. Analysts said Jabil produces the plastic cases for the iPhone 5C and the metal exteriors for the iPhone 5S.

THE AMERICAN ENERGY REVOLUTION (Cnt’d)

Cheap Natural Gas Could Put More Money in Americans’ Pockets

A surge in natural-gas production has driven prices down 50% in the last eight years, a stunning development that is reducing Americans’ energy costs, according to a study by the Boston Consulting Group. By 2020, these savings from low-cost energy could amount to nearly 10% of the average U.S. household’s spending after taxes and paying for necessities, or about $1,200 a year, the report said.

Economists say lower natural-gas prices will help U.S. businesses reduce costs, but there’s an important impact on consumers, too: The average U.S. household devoted about 20% of its total spending last year to energy, both directly (things like electricity and heating) and indirectly (higher costs for goods and services), BCG says. If Americans save more on energy and see lower prices when they buy goods, they might ramp up discretionary spending and propel the sluggish recovery. (…)

Consumer spending, which accounts for roughly two-thirds of the nation’s economic activity, has been resilient this year despite higher taxes and stagnant wages. One possible explanation is lower energy costs. Indeed, BCG says the average American household is already saving more than $700 a year. On Tuesday, the Labor Department said energy prices fell in November, helping muffle overall inflation. Prices at the gasoline pump have also fallen on average from nearly $3.70 in mid-July to below $3.25 as of Monday, according to the Energy Information Administration. (…)

 
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NEW$ & VIEW$ (11 DECEMBER 2013)

Pointing up Pointing up Pointing up The Fed Plan to Revive High-Powered Money

By Alan Blinder
Don’t only drop the interest paid rate paid on banks’ excess reserves, charge them.

Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of “excess reserves” buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that “most” members of its policy committee think a change “could be worth considering,” that’s almost like saying they love the idea. That’s news because they haven’t loved it before. (…)

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue. (…)

At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money.

If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want. (…)

Deal Brings Stability to U.S. Budget

House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), who struck the deal after weeks of private talks, said it would allow more spending for domestic and defense programs in the near term, while adopting deficit-reduction measures over a decade to offset the costs.

Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term jobless benefits, sought by Democrats, wasn’t included.

The plan is modest in scope, compared with past budget deals and to once-grand ambitions in Congress to craft a “grand bargain” to restructure the tax code and federal entitlement programs. But in a year and an institution characterized by gridlock and partisanship, lawmakers were relieved they could reach even a minimal agreement. (…)

The Murray-Ryan deal will likely need considerable Democratic support to pass the GOP-controlled House. Many Republicans, as well as a large number of conservative activists off Capitol Hill, argue that the sequester cuts have brought fiscal austerity to the federal budget and that they should not be eased. (…)

The depth of conservative opposition will become apparent as lawmakers absorb the details, which were released to the public Tuesday night. To draw support from the GOP’s fiscal conservatives, the deal includes additional deficit-reduction measures: While the agreement calls for a $63 billion increase in spending in 2014 and 2015, it is coupled with $85 billion in deficit reductions over the next 10 years, for a net deficit reduction of $22.5 billion.

The deal achieves some of those savings by extending an element of the 2011 budget law that was due to expire in 2021. The sequester currently cuts 2% from Medicare payments to health-care providers from 2013 through 2021. The new deal extends those cuts to 2022 and 2023. (…)

A Least Bad Budget Deal

The best that can be said about the House-Senate budget deal announced late Tuesday is that it includes no tax increases, no new incentives for not working, and some modest entitlement reforms. Oh, and it will avoid another shutdown fiasco, assuming enough Republicans refuse to attempt suicide a second time.

The worst part of the two-year deal is that it breaks the 2011 Budget Control Act’s discretionary spending caps for fiscal years 2014 and 2015. The deal breaks the caps by some $63 billion over the two years and then re-establishes the caps starting in 2016 where they are in current law at $1.016 trillion. Half of the increase will go to defense and half to the domestic accounts prized by Democrats. (…)

The deal means overall federal spending will not decline in 2014 as it has the last two years. (…)

All of this doesn’t begin to match the magnitude of America’s fiscal challenges, but it is probably the best that the GOP could get considering Washington’s current array of political forces. (…)

Four Signs the Job Market Is Getting Better 

Layoffs keep on falling: 1.5 million Americans were laid off or fired in October, the fewest since the government began keeping track in 2001. The October drop was unusually large and may be a fluke, but the trend is clear: Layoffs are back at or below prerecession levels.

Quits are rising: (…)  2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than a year earlier. Quits are still below normal levels, but they’re finally showing a clear upward trend.

And openings too: Employers posted 3.9 million job openings in October, also a postrecession high. (…) There were 2.9 unemployed workers for every job opening in October, the third straight month under 3 and down from a more than 6:1 ratio during the recession.

Hiring is finally rebounding: (…) Hiring has topped 4.5 million for three straight months for the first time in the recovery, and has been up year-over-year for four consecutive months.(…)

But don’t get too excited: (…)The three-to-one ratio of jobseekers to openings is nearly double its prerecession level, and would be higher if so many unemployed workers hadn’t abandoned their job searches. Companies remain reluctant to hire, and many of the jobs that are getting created are in low-wage sectors — nearly a third of October’s hiring came in the low-paying hospitality and retail sectors. The epidemic of long-term unemployment has shown little sign of easing. Despite signs of healing, in other words, a healthy job market remains a long way off.

Wells Fargo Chief Sees Healing Economy

Wells Fargo& Co. Chief Executive John Stumpf said Tuesday the economy is healing, five years after the bank purchased Wachovia Corp. in the midst of a global financial meltdown.

He said government progress on a budget deal, lower unemployment and signs businesses are looking to expand give him reason to be optimistic. “As I’m talking with our customers, especially our small business and middle-market customers, I’m starting to hear a little more about expanding businesses,” he said.

Now, go back to Alan Blinder’s op-ed above.

European carmakers: speeding up

(…) Consultants at LMC Automotive reckon that November saw a 0.7 per cent rise year on year. That follows increases of over 4 per cent and almost 5.5 per cent in October and September respectively – so, at long last, a sustained upward trend for Europe’s crisis-hit sector. 

High five In three of the big markets – Germany, France and Italy – the November sales pace was lacklustre at best and down by over 4 per cent at worst. Spain, which saw a strong advance, benefited from a very easy year-on-year comparison and scrappage incentives. Pricing, too, remains weak across the sector. Last week, Fiat detailed transaction (as opposed to listed) price trends, in segments ranging from economy to basic luxury models for both the German and Italian markets. As of September, these were barely above 2007 levels and, after allowing for inflation in the intervening period, well down in real terms.

Above all, given the small number of plant closures since 2008, Europe still has massive overcapacity on the production side. If 2013 ends with under 12m cars sold in western Europe and 4.5m in eastern Europe, the total will be down by a fifth on 2007 levels. Europe’s light vehicle production, meanwhile, will probably top 19m units – just two-thirds of estimated plant capacity. Sales rises of 2-3 per cent, say, in 2014 will make only modest inroads on that gap so pricing pressures may persist.

China New Yuan Loans Higher Than Expected

Chinese financial institutions issued 624.6 billion yuan ($103 billion) worth of new yuan loans in November, up from 506.1 billion yuan in October and above economists’ expectations.

Total social financing, a broader measurement of credit in the economy, came to 1.23 trillion yuan in November, up from 856.4 billion yuan in October.

China’s broadest measure of money supply, M2, was up 14.2% at the end of November compared with a year earlier, slightly lower than the 14.3% rise at the end of October, data from the People’s Bank of China showed Wednesday.

IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery

The IEA estimated today in its monthly oil market report that demand will increase by 1.2 million barrels a day, or 1.3 percent, to 92.4 million a day next year, raising its projection from last month by 240,000 a day. U.S. fuel use rose above 20 million barrels a day in November for the first time since 2008, according to preliminary data. While the agency boosted its forecast for the crude volume OPEC will need to supply, “making room” for the potential return of Iranian exports “could be a challenge for other producers” in the group, it said.

“The geopoliticals are now bearish, while the fundamentals are bullish,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said before the IEA published its report. “This is quite a change from just recently. People are anticipating tighter supplies as we go into next year. Demand will be higher.”

The agency raised estimates for supplies required next year from the Organization of Petroleum Exporting Countries by about 200,000 barrels a day, to 29.3 million a day. That’s still about 400,000 a day less than the group’s 12 members pumped in November, according to the report.

OPEC’s output fell for a fourth month, by 160,000 barrels a day, to 29.7 million a day in November, as a result of disruptions in Libya and smaller declines in Nigeria, Kuwait, the United Arab Emirates and Venezuela. The group decided to maintain its production target of 30 million barrels a day when it met on Dec. 4 in Vienna.

Saudi Arabia, the organization’s biggest member and de facto leader, kept production unchanged last month at 9.75 million barrels a day, the report showed.

This chart via FT Alphaville reveals how OPEC is effectively managing supply.

SENTIMENT WATCH

Can We Finally All Agree That This Is Not a Bubble?  All the bubble chatter over the past few months is increasingly looking like just a bunch of hot air.

A look at the IPO and M&A markets also point to caution rather than exuberance. “A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses,” said Jeffrey Kleintop, chief market strategist at Boston-based brokerage firm LPL Financial. While M&A activity is trending higher, it remains far below the peak 2007 levels, and 2000 for that matter, he pointed out.

RBC Capital has the chart:

image

 

Media bubble?

It seems to me that most media have been giving a positive spin to the not so great economic news of the past few months. This RBC Capital chart carries no emotion:

image

 

High Yield Spreads Hit a Six Year Low

(…) At a current reading of 411 basis points (bps) over treasuries, spreads are at their lowest level in more than six years (October 2007)!

With high yield spreads at their lowest levels since October 2007, skeptics will argue that the last time spreads were at these levels marked the peak of the bull market.  There’s no denying that, but we would note that in October 2007, spreads had already been at comparably low levels for more than three and a half years before the bear market started.  Additionally, back in the late 1990s we also saw a prolonged period where spreads were at comparably low levels before the market began to falter.

Another reason why the low level of spreads is of little concern is because default rates are also at historically low levels.  According to Moody’s, the default rate for junk rated American companies dropped to 2.4% in November, which according to Barron’s, “is barely more than half its long-term historic average and down from 3.1% a year ago.”

Not really bubbly, but getting closer…

Here’s an interesting chart:

Performance of Stocks vs Bonds

(…)  With the S&P 500 up 23.4% and long-term US Treasuries down 10.2% over the last 200-trading days, the current performance spread between the two asset classes is above 30 percentage points.  (…)

While it is common for equities to outperform treasuries, the current level of outperformance is relatively uncommon.  In the chart below, anything above the green line indicates a performance spread of more than 30 percentage points.  As you can see, the only other periods where we saw the spread exceed 30 were in 1999, 2003, 2009, and 2011.

What makes the current period somewhat different, though, is the period of time that the spread has been at elevated levels.  With the spread first exceeding 30 percentage points back in March, we are now going on nine months that the spread has been at elevated levels.  At some point you would expect the two to revert back to their long-term historical average.

Hedge funds attract billions in new money
Investor inflows jump sharply even as performance lags stocks

Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7 per cent on their assets under management at the end of 2012, according to figures from the data provider Preqin.(…)

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

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

With the same humongous fees…

Yesterday, I posted on this:

 

Fatter Wallets May Rev Up Recovery

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, according to the Fed.

Which deserves two more dots to explain the feeble transmission pattern of the past several years:

The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

Click to View

  • And these charts from RBC Capital:

imageimage

image

 
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NEW$ & VIEW$ (9 DECEMBER 2013)

GREEN FRIDAY

After pretty tame Black Friday and Thanksgiving sales, investors got their Green Friday with an ‘Unambiguously Positive’ Jobs Report accompanied by a relieving 1.1% jump in the S&P 500 Index, the best of all worlds for taper advocates. Good news is good news again!

The media narratives just flowed from that.

Employers Gain Confidence to Hire

U.S. employers are gaining confidence heading into year’s end, hiring at the quickest clip since before Washington’s political dysfunction rattled consumers and businesses this fall.

Payrolls rose by a seasonally adjusted 203,000 in November in sectors ranging from construction to health care, a striking pickup at an uncertain moment for the economy. Moreover, the jobless rate fell to 7% from 7.3%, though its declines in recent months have been driven in part by people leaving the labor force. (…)

U.S. job growth over the past three months now averages 193,000. In September, the average was thought to be 143,000; it has since been revised higher. (…)November’s job gains were more broad-based than in some previous months, suggesting fundamental economic improvements are reaching more parts of the economy.

Economists have worried that the biggest drivers of the nation’s job growth are lower-paying industries like retailers and restaurants. While those industries still represent a big chunk of the job gains, higher-paying sectors like manufacturing also grew in November, adding 27,000 jobs. (…)

It remains that

Nearly one-third of the private-sector job gains in November came from retailers, hotels, restaurants and temporary help agencies.

Retailers added 22,000 workers last month, while restaurants and hotels added 17,000 positions. Temporary help services hired another 16,000.

Lower-paying industries have dominated U.S. job growth for much of the recovery. Over the past year, retailers and temporary-help services have added 323,000 and 219,000 jobs, respectively.

By comparison, manufacturers added only 76,000 jobs.

As we all know, stats can be used to fit any viewpoint: the low month for job growth in 2013 was July at 89k.

  • First 6 months average employment change: +195k.
  • Last 5 months average employment change: +181k. Not enough to call it an ‘Unambiguously Positive’ jobs report. Tapering delayed.

But move July into the first part of the year:

  • First 7 months average employment change: +180k.
  • Last 4 months average employment change: +204k. Here comes the taper!

Never mind that the economy has added 2.3 million jobs over the past year, a pace that has changed little for the past two years in spite of QE1, 2,and 3.

Never mind that

Compared with September, the last reading before the shutdown, the new figures showed 265,000 fewer people working or looking for work, taking the labour market participation rate down from 63.2 per cent to 63 per cent of the adult population.

Declining participation was the main cause of the large fall in the unemployment rate, creating a puzzle and a worry for the Fed. If people are permanently dropping out of the labour force then it suggests there is less spare capacity in the economy.(FT)

Never mind that

Markit’s recent PMI surveys showed that the rate of growth was below that seen in September. Hiring slipped to the lowest for eight months as a result of firms reporting growing unease about the outlook. (Markit)

image

And never mind the important inventory build up revealed by the Q3 GDP, recent car data and clear evidence of enormous surplus retail inventory post Thanksgiving, all suggesting that the recent manufacturing uptrend may be short lived. The U.S. economy, and for that matter Europe’s as well, have been propped up by a production push rather than by a more solid and durable consumer pull.

Real consumer expenditures rose 0.3% MoM in October after edging up 0.1% in September, in spite of a 0.2% advance in real disposable income during the last 2 months. Taking the 4-month period from July, real expenditures are growing at a 1.8% annualized rate, unchanged from the preceding 4-month period. During both periods, real disposable income has grown 2.7% annualized but real labour income growth halved from 1.8% annualized in March-June to 0.9% annualized in July-October.

Consumer demand sustained by government transfer income and a low savings rate is not solid foundation for economic growth, needless to say. It gets even more dangerous when corporate inventories accumulate rapidly, especially during the all important fourth quarter.

Taper or not? Taking liquidity out when things are so fragile would be a big mistake in my view. The Fed won its bet with QE-induced wealth boost for the top 10% but it would be ill-advised to take the punch bowl away before the ordinary people’s party begins.

Fed credibility has already been hurt by all the goofy rhetoric since last May. The only transparency they have achieved is to expose their flaws wide open. When you decide to be more transparent, you better make sure that what you have to show is attractive…otherwise, be a Greenspan and let markets guess for haven’s sake.

To be sure, as BCA Research is quoted in Barron’s (my emphasis),

(…) policy makers are hoping for a cyclical rebound in the participation rate as discouraged workers are drawn back into the labor market. There is no evidence that this is occurring so far.


As a result, BCA thinks the Fed will lower the threshold for forward guidance about increases in the federal-funds target (which has been pinned near 0% to 0.25% since late 2008) until the jobless rate falls to 5% or even 5.5%, instead of the current 6.5%, which could be reached by next October if current trends continue. The Fed’s notion is that the better job market will lure folks on the sideline to start looking for work again, slowing the decline in unemployment, even as more people find positions. But BCA says its clients are increasingly worried that there is less slack in the labor market than presumed and that the Fed is making an inflationary policy mistake.

Much like a rising equity market eventually lures investors into action.

In all what was said and written last Friday, this is what must be most reassuring to Ben Bernanke:

Jonas Prising, president of staffing company Manpower Group, said the official numbers fit with what is happening on the ground. “What we see is a continued improvement in employers’ outlook. Despite what you see and hear about uncertainty, employers are clearly seeing a gradually improving economy,” said Mr Prising, noting that the pick-up in hiring was slow but steady. (WSJ)

TAPER WATCH

This is from Fed’s mouthpiece John Hilsenrath:

Fed Closes In on Bond Exit

Fed officials are closer to winding down their $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday’s encouraging jobs report.

The Fed’s next policy meeting is Dec. 17-18 and a pullback, or tapering, is on the table, though some might want to wait until January or even later to see signs the recent strength in economic growth and hiring will be sustained. On Tuesday, officials go into a “blackout” period in which they stop speaking publicly and begin behind-the-scenes negotiations about what to do at the policy gathering. (…)

The sharp rise in stocks Friday shows that the Fed is having some success reassuring investors that it will maintain easy-money policies for years to come.

(…) the November employment report was the latest in a batch of recent indicators that have boosted their confidence that the economy and markets are in better position to stand with less support from large monthly central bank intervention in credit markets.

Pointing up The economic backdrop looks better now than it did in September. Fingers crossed

Payroll employment growth during the past three months has averaged 193,000 jobs per month, compared with 143,000 during the three months before the September meeting.

Moreover, in September, the White House and Congress were heading into a government shutdown and potential a debt ceiling crisis. Now they appear to be crafting a small government spending agreement for the coming year. The headwinds from federal tax increases and spending cuts this year could wane, possibly setting the stage for stronger economic growth next year.

Still, the jobs report wasn’t greeted as unambiguously good news inside the Fed. One problem was an undertone of distress among households even as the jobless rate falls.

The government’s survey of households showed that a meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell from 7.2% to 7% during the period effectively because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.

“The unemployment rate [drop] probably overstates the improvement in the economy,” Chicago Fed President Charles Evans told reporters Friday.

Another worry among officials, and another reason some officials might wait a bit before moving: Inflation, as measured by the Commerce Department’s personal consumption expenditure price index, was up just 0.7% from a year earlier, well below the Fed’s 2% target. Mr. Evans said he was troubled and puzzled by the very low inflation trend. (…)

Fed December Taper Odds Double in Survey as Jobs Beat Estimate

 

The share of economists predicting the Federal Reserve will reduce bond buying in December doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year. (…)

The payroll report puts the four-month average for gains at 204,000, and the six-month average at 180,000. Chicago Fed President Charles Evans, a supporter of record stimulus who votes on policy this year, said in April he wants gains of 200,000 a month for about six months before tapering. Atlanta’s Dennis Lockhart, who doesn’t vote, said several months of gains exceeding 180,000 would make slowing appropriate.

“The 200,000 number hits you right between the eyes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “That’s a number that everyone agrees the labor market is showing good-size gains, and the progress they’re making seems to be sustainable if that marker is met, which it was.”

See! It all boils down to where July stands in the economic calendar.

Credit-Card Debt Hits Three-Year High

U.S. consumers pushed their credit-card debt to a three-year high in October, a possible sign of their willingness to boost spending into the holiday season.

Revolving credit, which largely reflects money owed on credit cards, advanced by a seasonally adjusted $4.33 billion in October, the Federal Reserve said Friday. The expansion pushed total revolving debt to $856.82 billion, the highest level since September 2010.

The expansion marked a reversal from the prior four months when revolving balances either declined or held nearly flat. Consumers’ reluctance to add to credit-card balances was viewed by some economists as a sign of caution.

“Increasingly households are becoming more comfortable with using their plastic, and carrying a balance on it,” said Patrick J. O’Keefe, director of economic research at consulting firm CohnReznick. “The scars of 2007 and 2008 are starting to heal.”

When consumers are willing to carry a credit-card balance, it suggests they are confident they’ll have the future income needed to pay down the debt, he said.

The turnaround came in a month that brought a 16-day government shutdown, which weighed on consumer confidence and left hundreds of thousands of government workers without paychecks for weeks. (That may have been one factor in the increased use of credit cards. The federal workers received back pay after the shutdown.)

Total consumer credit, excluding home loans, rose by $18.19 billion in October, the largest gain since May. Economists surveyed by Dow Jones Newswires had forecast a $14.8 billion advance. (…)

The Fed report showed non-revolving debt, mostly auto and education loans, increased by $13.85 billion, or a 7.5% annualized jump. Such debt has been trending steadily higher since 2010, reflecting a surge in government-backed student loans and purchases of new autos. (…)

(ZeroHedge)

Fingers crossed  Congress Readies a Year-End Budget Dash

A Congress stymied by partisan divides, blown deadlines and intraparty squabbling gets a late chance to end the year with an elusive budget deal.

In the final week of 2013 that the Senate and House are scheduled to be in Washington at the same time, lawmakers and aides are optimistic that negotiators can reach a budget accord and continue to make progress on a farm bill and other measures.

China Exports Rise More Than Estimated

Overseas shipments rose 12.7 percent from a year earlier, the General Administration of Customs said today in Beijing. That exceeded estimates from 41 of 42 analysts surveyed by Bloomberg News. The trade surplus of $33.8 billion was the biggest since January 2009, while imports gained 5.3 percent, compared with a median projection of 7 percent.

The export figures reflect pickups in shipments to the U.S., Europe and South Korea, according to customs data.

China Inflation Stays Benign

 

The November consumer-price index was up 3% from a year ago, slowing down slight from October’s 3.2% pace, the statistics bureau said Monday. That was just below market expectations of a 3.1% rise and well within the government’s target of 3.5% inflation for the year.

Consumer inflation was even less of a worry when looked at on a month-over-month basis: It showed a decline of 0.1% in November, its first such drop since May.

At the factory level, producer prices continued to slide year-over-year, falling 1.4% for the 21st monthly decline in a row, showing continued weakness in domestic demand for raw materials. The decline in November was slightly less than the October’s 1.5%.

Japanese growth revised down
Third-quarter growth hit by weaker business activity

The updated calculation of gross domestic product in the three months to September showed that economic output increased at an annualised rate of 1.1 per cent, compared with an initial estimate of 1.9 per cent announced in November. (…)

The downward revision for the third quarter owed to lower estimates of investment and inventory-building by companies. Consumer spending was revised upward, but not enough to offset the less favourable view of business activity.

Corporate capital investment did not grow at all during the period, the data showed; the initial estimate had suggested a 0.7 per cent expansion. Inventory growth was cut to 0.7 per cent from double that figure in the initial data, while the estimate of private consumption growth was doubled to a still modest 0.8 per cent.

Bundesbank lifts German growth outlook
Central bank forecasts economic expansion of 1.7% in 2014

Germany’s Bundesbank has upgraded its economic projections, saying on Friday that strong demand from consumers would leave the euro area’s largest economy operating at full capacity over the next two years.

The Bundesbank has forecast growth of 1.7 per cent in 2014 and 1.8 per cent the following year. The unemployment rate, which at 5.2 per cent in October is already among the lowest in the currency bloc, is expected to fall further. (…)

The Bundesbank also expected inflation to fall back in 2014 – to 1.3 per cent from 1.6 per cent this year – before climbing to 1.5 per cent. If falls in energy prices were excluded, inflation would register 1.9 per cent next year.

EARNINGS, SENTIMENT WATCH

Notice the positive spin and the bee-sss just about everywhere now.

U.S. stocks could weather grim profit outlooks

The ratio of profit warnings to positive outlooks for the current quarter is shaping up to be the worst since at least 1996, based on Thomson Reuters data.

More warnings may jolt the market next week, but market watchers say this trend could be no more than analysts being too optimistic at the beginning and needing to adjust downward.

“There’s a natural tendency on the part of Wall Street in any given year to be overly optimistic as it relates to the back half of the year … It isn’t so much the companies’ failing, it’s where Wall Street has decided to place the bar,” said Matthew Kaufler, portfolio manager for Clover Value Fund at Federated Investors in Rochester, New York.

So any negative news about earnings may “already be in the stock prices,” he said. Sarcastic smile (…)

Still, estimates for fourth-quarter S&P 500 earnings have fallen sharply since the start of the year when analysts were building in much stronger profit gains for the second half of the year.

Earnings for the quarter are now expected to have increased 7.8 percent from a year ago compared with estimates of 17.6 percent at the start of the year and 10.9 percent at the start of the fourth quarter. (…)

The 11.4 to 1 negative-to-positive ratio of earnings forecasts sets the fourth quarter up as the most negative on record, based on Reuters data.

So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.

In small and mid-cap stocks, the trend appears much less gloomy.

Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The S&P 500 technology sector so far leads in negative outlooks with 28, followed by consumer discretionary companies, with 22 warnings for the fourth quarter. (…)

“It appears while the percentage (of warnings) is high, it’s still not really infiltrating to all sectors,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. “Obviously it impacts the individual (stocks), but maybe not the market trend.” (…)

So, this is a stock market, not a market of stocks!

Punch  That said, here’s a surprise for you: analysts estimates have actually gone up in the past 10 days:

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CAPITULATION
 
Hugh HendryA bear capitulates
Hugh Hendry on why equities will rise further

Hugh Hendry is CIO of Eclectica Asset Management

(…) In this environment the actual price of an asset no longer has anything to do with our qualitative perception of reality: valuations are out, liquidity in. In the wacky world created by such monetary fidgeting there is one reason for being long markets and one alone: sovereign nations are printing money and prices are trending. That is it. (…)

So here is how I understand things. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should be long risk assets if you believe China will have lowered its growth rate from 7 per cent to nearer 5 per cent over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan.

It will all end badly; the mouse will die of course but in the meantime the stock markets look to us much as they did in 1928 or in 1998. In economic terms, America and Europe will remain resilient without booming. But with monetary policy set much too loose it is inevitable we will continue to witness mini-economic cycles that convince investors that economies are escaping stall speed and that policy rates are likely to rise. This happened in May.

The Fed, convinced its QE programme had succeeded in re-distributing global GDP away from China, began signalling its intent to taper. However, the anticipated vigorous American growth never materialised. The Fed had to shock market expectations by removing the immediacy of its tighter policy and stock markets rebounded higher.

So the spectre of tapering will probably continue to haunt markets but stronger growth in one part of the world on the back of easier policy will be countered by even looser policy elsewhere. Market expectations of tighter policy will keep being rescinded and markets, for now, will probably just keep trending.

Lance Roberts today (with a lot more from Hugh Hendry if you care):

(…) The PRIMARY ISSUE here is that there is NO valuation argument
that currently supports asset prices at current levels.

It is simply the function of momentum within the prevailing trend that makes the case for higher prices from here.

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Hmmm…The trend is your friend, hey? With friends like that…

THE U.S. ENERGY GAME CHANGER

I wrote about that in 2012 (Facts & Trends: The U.S. Energy Game Changer). It is now happening big time.

Shale gas boom helps US chemicals exports
America now second cheapest location for chemicals plants

The US chemicals industry is planning a sharp increase in its exports as a result of the cost advantage created by the shale gas boom, putting pressure on higher-cost competitors in Europe and Asia.

The American Chemistry Council, the industry association, predicts in forecasts published this week that US chemicals exports will rise 45 per cent over the next five years, as a result of a wave of investment in new capacity that will be aiming at overseas markets. (…)

The shale revolution has caused a boom in US production of natural gas liquids used as chemical feedstocks such as ethane, and sent their prices tumbling.

US producers also face electricity costs about half their levels in Europe, and natural gas just one-third as high.

The result has been a dramatic reversal from the mid-2000s, when the US was one of the world’s most expensive locations for manufacturing chemicals, to today when it is the second cheapest, bettered only by projects in the Middle East that have tied up feedstock on favourable terms.

International chemicals companies have announced 136 planned or possible investments in the US worth about $91bn, according to the ACC, with half of those projects proposed by non-US companies. (…)

“The US has become the most attractive place in the world to invest in chemical manufacturing.”

DEMOGRAPHICS

We can discuss political and financial philosophies, fiscal policies and monetary policies till the cows come home. But there is one thing that is mighty difficult to argue about: demographics. As Harry Dent says in this interview with John Mauldin, you have to go back 250 years to find a generation with as much impact as the current supersized baby boomer generation. The impact of retiring baby boomers is so powerful that it can totally offset fiscal and monetary policies without anyone noticing. The 20 minutes interview is not as good as I was hoping it might be but still deserves your time.

A team of Kansas City Fed economists just wrote about The Impact of an Aging U.S. Population on State Tax Revenues (http://goo.gl/u5g3j5) with this chart that summarizes the stealth trends underway:

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Here’s another way to deal with an adverse job market:

Saudi deportations gain momentum
Riyadh to expel up to 2m workers

Riyadh has said it wants to forcibly expel as many as 2m of the foreign workers, including hundreds of thousands of Ethiopians, Somalis, Indians, Pakistanis and Bangladeshis, who make up around a third of the country’s 30m population.

At home, the exodus of illegal workers is being seen as the kingdom’s most radical labour market experiment yet. With one in four young Saudi males out of work, analysts applaud Riyadh’s determination to tackle the problem, but doubt the crackdown will achieve its objective, as Saudi nationals are unlikely to apply for menial jobs. (…)

Ethiopia, Yemen, Somalia and several other countries are struggling to absorb the thousands of unemployed young men now returning, with development officials worrying about the impact on remittances.

Saudi Arabia is the world’s second biggest source of remittances, only behind the US, with outflows of nearly $28bn last year, according to estimates by the World Bank. (…)  Saudi analysts expect the crackdown on illegal workers to reduce remittance flows by nearly a quarter next year, or about $7bn. (…)

The crackdown on African and Asian illegal migrants is meant to complement a government labour market reform known as nitaqat, Arabic for “ranges”. Replacing the failing fixed-quota “Saudisation” system of 1994, nitaqat places a sliding scale of financial penalties and incentives on employers who fail to hire enough Saudi nationals. By draining the pool of cheap expatriate labour, the Saudi government hopes to encourage private sector employers to hire more nationals.

“The nationalisation agenda has been around for 20 years, but what’s changed is that the Arab spring has made private sector jobs for nationals a political priority,” says Steffen Hertog of the London School of Economics. “Saudi Arabia has become a laboratory for labour market reform,” he says. (…)

BUY LOW, SELL HIGH

A 700- year chart to prove a point:

Global Financial Data has put together an index of Government Bond yields that uses bonds from each of these centers of economic power over time to trace the course of interest rates over the past seven centuries.  From 1285 to 1600, Italian bonds are used.   Data are available for the Prestiti of Venice from 1285 to 1303 and from 1408 to 1500 while data from 1304 to 1407 use the Consolidated Bonds of Genoa and the Juros of Italy from 1520 to 1598.

General Government Bonds from the Netherlands are used from 1606 to 1699.   Yields from Britain are used from 1700 to 1914, using yields on Million Bank stock (which invested in government securities) from 1700 to 1728 and British Consols from 1729 to 1918.  From 1919 to date, the yield on US 10-year bond is used.

Ralph Dillon of Global Financial Data

 
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NEW$ & VIEW$ (12 SEPTEMBER 2013)

Demand for Home Loans Softens

The Mortgage Bankers Association said Wednesday that mortgage applications dropped 13.5% in the week ended Sept. 6 from the previous week. The data, which include an adjustment for the Labor Day holiday, reflect a 20% drop in refinancing and a 3% decline in purchase loans.

Italy Output Unexpectedly Falls Signaling Slump May Not Be Over

Output fell 1.1 percent from June, when it rose a revised 0.2 percent, national statistics office Istat said in Rome today. Economists had estimated a 0.3 percent rise in July, according to the median of 16 estimates in a Bloomberg News survey. Output fell 4.3 percent from a year earlier when adjusted for working days.

The Italian economy contracted in the second quarter 0.3 percent, more than the 0.2 percent initially estimated, Istat said earlier this week. On Sept. 10 the institute said that exports failed to offset falling domestic demand in the period as joblessness remained close to 12.2 percent, the highest level since unemployment records began in 1977.

Today’s report contrasts with the optimism expressed in recent forecasts. Gross domestic product is estimated to be little changed in the three months through September and rise by 0.3 percent in the fourth quarter, employers lobby Confindustria said yesterday in a report. The Rome-based lobby said it now expects the economy to decline 1.6 percent this year and expand 0.7 percent in 2014. In June, Confindustria estimated GDP to contract 1.9 percent in 2013 and rise 0.5 percent next year.

Reuters adds

 

Industrial production shows a close correlation with gross domestic product in Italy.

In the three months to July, output was down 0.5 percent from the previous three months.

National statistics institute ISTAT slightly revised down June’s output data to show a 0.2 percent rise, originally reported at +0.3 percent.

On a work-day adjusted year-on-year basis, output in July was down 4.3 percent, compared to a 2.1 percent decline in June.

Hmmm…

Europe_20(2)

France to Miss Deficit Goals

The government said it will miss its deficit targets this year and next due to a weaker-than-expected economic recovery.

[image](…) The government, which had already abandoned the goal of getting the deficit down to 3% of economic output in 2013, said Wednesday that it would come in at 4.1% in 2013 and 3.6% in 2014.

Economic growth will be only 0.1% this year and accelerate slowly to 0.9% in 2014, instead of 1.2% as the government had previously forecast, he said.

Mr. Moscovici, who made headlines over the summer by acknowledging that the French are fed up with taxes, said the time had come to focus more on spending cuts than on tax increases.

The government is targeting €15 billion of savings in the 2014 budget from such areas as ministry expenses and health-care spending. Earlier this year, the government said there would be around €6 billion of extra taxes in the 2014 budget, but that will now be closer to €3 billion, ministers said.

In a sign of how the government is trying to shift the fiscal burden away from companies, Mr. Moscovici said business taxes will be stable next year.

“Taxes have risen strongly in recent years,” he said. “It is necessary to trend towards stabilizing taxation, which is in turn necessary to stimulate various growth engines.”

Li Says China Rebound Not Yet on Solid Foundation

Indonesia Raises Rate to Four-Year High as Rupiah Extends Slide Bank Indonesia raised its key interest rate for the fourth time since early June to support a weakening currency and cool inflation expectations.

Philippines Holds Key Rate at Record Low to Support GDP Growth

Japan mulls $50 billion stimulus to offset sales-tax hike: sources

 
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NEW$ & VIEW$ (5 SEPTEMBER 2013)

Auto U.S. Car Sales Soar to Pre-Slump Level

The U.S. auto industry has shifted into high gear with new-car buyers snapping up vehicles last month at a pace not seen since before the financial crisis.

All told, buyers purchased 1.5 million vehicles last month, up 17% from a year ago, with nearly all major auto makers reporting double-digit sales gains.

August’s sales translated to an annualized pace of 16.09 million vehicles, up from December 2007′s about 16 million. Some 17.4 million vehicles were sold in 2000.

Automotive website TrueCar.com estimates car companies spent an average of $2,477 on sales incentives last month, down 2.6% from a year ago and the lowest level since January.

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Pointing up  The CalculatedRisk chart above shows that car sales are back to their previous 4 cyclical peaks if one accepts that the 1998-2007 levels were boosted by the irrational exuberance that characterized those years and are unlike to repeat anytime soon. However, unlike housing, interest rates on car loans have not risen just yet. But keep in mind that truck sales have jumped lately on the back of an improving housing sector.

(Bespoke Investment)

The WSJ article goes on with these interesting facts on the auto industry:

While the sales pace returned to prerecession levels, the U.S. auto industry looks nothing like its old self. GM, Ford and Chrysler Group LLC are now much leaner. GM employs about 212,000 people in the U.S., about 31,000 fewer than in 2008. Ford’s workforce here is about 171,000, down 42,0000 from five years ago. Before Chrysler was split off from its German partner, Daimler AG, it employed 83,000. Today, its payroll is about 65,000.

That’s nearly 100k (-24%) fewer employees for the same sales volume. 

The three auto makers combined have closed more than two dozen auto-assembly, stamping, engine and transmission plants across the Midwest and in Canada. Health care costs for retired union workers, which once added about $2,000 to the cost of a car, are now born not by the companies but union-controlled trusts. Union wages have also fallen. New hires started at about $14 an hour, half of what veteran workers make.

Detroit auto makers abandoned brands such as Pontiac, Saturn, Hummer and Mercury. GM and Chrysler dropped more than 2,000 dealers from their sales networks, and all three companies stopped profit-denting practices such as dumping cars into rental car fleets and stuffing dealers with cars and trucks that consumers didn’t want.

As a result, the Detroit Three can now make money at lower sales volumes, and on lower-priced vehicles. A decade ago, all three companies struggled to make money when Americans were buying more than 16 million cars a year regularly. Now they say they can make money with sales below 12 million vehicles a year.

TITLE EXUBERANCE

 

Data Signal Consumer-Spending Rise

Imports rose 1.6% in July from the prior month, aided by strengthening domestic demand for industrial supplies and consumer products, Commerce Department figures showed Wednesday. Exports fell 0.6%, giving up some ground after the surging to a record high in June, though several key U.S. export markets showed signs of firming.

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A quick look at the imports chart reveals precious little hint of a revival. Imports have been flat for 18 months. Now, that is partly due to declining oil imports which the WSJ article omits to mention. Actually, total imports are up 4.5% annualized in the last 3 months but non-petroleum imports are up a meagre 0.8% annualized and only 1.3% Y/Y in July as this Haver Analytics chart shows.

 

Here’s the interesting part from the trade report:

July exports to the European Union rose a non-seasonally adjusted 2.6% from the same period a year earlier, bucking a recent downward trend.

July exports to Brazil of $4.4 billion were the highest on record. Exports to China also rose, reflecting a stabilization in the world’s second-largest economy after a sharp slowdown in growth earlier in the year.

The positive trend in U.S. exports to the E.U. becomes even more significant when we consider that Canadian exports to the E.U. were down some 18% YoY in July. Big market share shifts underway?

CANADIAN HOUSING

From BMO Capital:

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U.S. Economy Grew at Modest to Moderate Pace in July, August

(…) The central bank’s “beige book” report, a summary of conditions in its 12 districts from early July through late August, was largely positive. Eight districts reported moderate growth, while three said growth was modest. The remaining district, Chicago, said economic activity had improved.

Back-to-school shopping helped boost overall consumer spending, particularly in Boston, Kansas City and Dallas. Sales were mixed in New York, and were more modest in the other districts. Activity in the travel and tourism sectors expanded in most areas.

Demand rose in part from stronger car sales and housing-related goods such as furnishings or home-improvement items, the report said. Still, several regions said consumers remain cautious and “highly price-sensitive.” (…)

Wage pressures remained modest overall, with some companies in the New York region reporting more willingness to negotiate salaries. Still, pay rates “have not escalated significantly,” the report said. Rising health-care costs have continued to put upward pressures on overall compensation costs.

Lending activity weakened a bit, the report said, with several districts reporting less-favorable conditions than in the preceding period. Several regions described business lending as largely flat, and Chicago said that the recent interest-rate rises were likely depressing commercial investment. (…)

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Bank of Japan Says Economy Is on Recovery Track

The Bank of Japan on Thursday formally proclaimed that the world’s third-biggest economy is back on a recovery track, a move that could tip the balance in favor of those who support a sales-tax hike from next spring as Prime Minister Shinzo Abe nears a decision on whether to go ahead with the plan.

The upgrade in the central bank’s assessment will likely strengthen speculation that it will hold off on any additional monetary easing for the time being, at least until the sales-tax increase is launched in April. The BOJ’s nine-member policy board Thursday decided to stand pat on monetary policy.

China Record Drop in Credit Growth Puts Momentum at Risk

New yuan loans were probably little changed in August, after aggregate financing, the broadest measure of credit, posted a fourth straight drop in July, the longest streak in 11 years of data.

The moderation in credit after a record first-quarter financing boom stands to cap an economic rebound being driven by a recovery in confidence and Premier Li Keqiang’s support measures, such as faster spending on railways. Overcapacity and pressure to clean up debt loom as challenges, according to JPMorgan, which sees growth slowing to 7.2 percent in 2014 from 7.6 percent this year.

DIGGING FOR YIELD? Make sure you don’t burry yourself.

For the full year, bonds rated CCC or lower have gained 7.1% while AAA debt has lost 5%. It’s only the third time since 1996 low-rated debt has gained while top-rated paper lost value.

America’s ‘Baby Bust’ Starts to Ease The nation’s fertility rate stabilized last year for the first time in five years. That follows four years of big declines during the economic downturn that pushed the rate to the lowest levels on record.

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Demographic Intelligence, a for-profit forecasting firm, projects the so-called total fertility rate—which measures the average number of children born to women over their lifetimes—will rise slightly from 1.89 children per woman in 2012 to 1.90 in 2013. The rate stood at 2.12 in 2007.

Sam Sturgeon, the firm’s president, sees “modest” increases in 2014 and 2015 too, though not enough to reach the 2.1 rate that is considered the level needed to keep the U.S. population stable. When asked, American women still say they want two children—one boy and one girl, Mr. Sturgeon said.

 
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