NEW$ & VIEW$ (10 APRIL 2013)

Soft patch watch. Housing costs going up. OECD LEIs. Beware Slovania, but France and Europe even more. China car sales, trade data. Copper and oil. Sentiment watch.


Recent data points to a soft patch:

  • NFP Employment (payroll and household)
  • U.S. ISM
  • Vehicle sales
  • Unemployment claims
  • Heavy truck sales
  • NFIB

Small Firms Curtail Plans To Add Staff As Confidence Ebbs(Chart fro IBD)


Evidence of a slowdown has also played out in Citigroup’s U.S. Economic Surprise Index, which measures the degree to which economists’ consensus estimates have been too optimistic or pessimistic about data releases. The index has been trending lower over the past few weeks and on Monday fell to its lowest level since Feb. 25. (WSJ’s Market Beat)

Although not in housing:

U.S. Land Gets More Expensive

The rebounding U.S. housing market has sparked a sharp rise in land prices, creating big profits for land investors but putting pressure on builders to further increase the price of new homes.

[image]Land values across the U.S. rose on average 13% in 2012, the first annual gain since 2005, according to estimates in a March report by Zelman & Associates, a housing consultancy. (…)

Land cost constitutes 21.7% of the final sale price of a new home, according to the National Association of Home Builders. As land prices rise, builders tend to pass 100% of those costs on to consumers.

Buck Horne, a housing analyst with Raymond James & Associates, predicts that new-home prices will rise 10% to 15% in 2013, chiefly because of rising demand and because of the scarcity of land.


Lumber Prices near Housing Bubble High



OECD says growth picking up in most major economies

The Paris-based think tank’s composite leading indicator shows growth firming in Japan and picking up in China while the outlook is improving for Italy and France is stabilizing.




EU Sounds Alarm on Spain, Slovenia Economies

(…) In Spain, a deep recession, deleveraging and bumpy access to market financing remain a “tangible threat” the report warned. It called the country’s reform agenda “incomplete,” despite fiscal cuts and a deep restructuring of the banking sector as part of a €41.3 billion ($54.03 billion) financial sector bailout from the euro zone. (…)

Slovenia’s troubles emanate from excessive corporate debt that is sending ever more loans into the red—the report says 23.7% of corporate loans are nonperforming, which means they are in arrears for longer than three months.

“Credit is contracting and the interaction between weak banks and the sovereign has intensified. The state has de facto become the source of capital,” the report said. It warned that deleveraging in the banking sector combined with a double-dip recession are making it hard for companies to grow and are leaving troubled assets stuck on banks’ balance sheets. (…)

The Commission’s report identified another 11 countries that need to correct imbalances, but said these weren’t “excessive.” The countries are Belgium, Bulgaria, Italy, the United Kingdom, France, Italy, Sweden, Finland, Malta, Hungary and the Netherlands.

France, the euro zone’s second-largest economy, was losing its ability to deal with sudden economic downturns outside its borders, the report said.

“The resilience of the country to external hocks is diminishing and its medium-term growth prospects are increasingly hampered by long-standing imbalances,” it said.

But Gavekal is more realistic about France and the collateral damage to the Eurozone:

The severe squeeze on household income will ensure a collapse in French
imports which can only have negative consequences for producers in
Spain and Italy—for most eurozone countries France is their second largest export market.

France’s budget deficit is going to explode. Higher unemployment will push up government spending, while reduced consumption causes a
collapse in VAT receipts. And lower economic activity reduces all forms
of tax income that a voracious government machine so depends upon.



French long rates will quickly come under pressure as was the case for Spain and Italy once their budgetary situation deteriorated—the French government is hugely complacent about its entitlement to low cost funding even though any spike in rates will quickly make the budget situation untenable. (…)

But what especially scares me about the French situation is that the
economy is already suffering a huge credit crunch which can only get


EU intensifies reform pressure on France
Brussels issues stinging report on government’s efforts

(…) it warns that France’s increasing sovereign debt levels, which are expected to rise to 93.8 per cent of economic output next year, are not only choking off growth prospects but are threatening the country’s banking system and the broader European economy.

Weak economy adds to Hollande’s headache
As the president grapples with fallout from a scandal, France eked out 0.1% growth in the first quarter

Car sales back on fast track  China’s passenger vehicle sales returned to high-speed growth in March due to surging demand for entry-level cars, as well as the flurry of new models launched in the spring.

The total sales of passenger cars, sport-utility vehicles, multi-purpose vehicles and minivans jumped 15 percent year-on-year to 1,459,095 units in March, the third-highest monthly growth in a year, the association said.

The strong performance in March boosted first-quarter domestic passenger vehicle sales to 4.21 million units, up 19.2 percent year-on-year.

Rao also predicted robust growth in April as the Shanghai International Auto Show, which will start on April 21, will further boost consumption enthusiasm with new models expected to be launched by nearly all the brands.

China trade data raise accuracy worries
Volatility and discrepancies in the March figures questioned

China’s latest trade figures showed a sharp decline in export growth combined with a strong rebound in imports in March, but volatility and discrepancies in the data have raised concerns about their accuracy.

Exports from China increased 10 per cent in March from the same month a year earlier, compared with a 22 per cent increase in February, while imports surged 14.1 per cent in March, compared with a year-on-year drop of more than 15 per cent the previous month, according to Chinese customs administration data released on Wednesday.

China Exports Miss Forecasts as ‘Absurd’ Data Defended

An “astounding” 92.9 percent jump in exports to Hong Kong, the most in 18 years, raises questions on data quality, researcher IHS Inc. said.

The customs agency acknowledged concerns that the data may be overstated at a press briefing today while standing by its figures and saying the Hong Kong gains stem from different statistical methods. Sales to the U.S. and Europe both fell for the first time since November, leaving the world’s second- largest economy with weaker global demand to support a recovery.


Copper Sentiment Plunges, Critical Price Points for Copper and Crude Oil

(By Chris Kimble of Kimble Charting Solutions)

OPEC Trims Oil Demand Growth Forecast; March Output Drops

Worldwide oil consumption will rise this year by 800,000 barrels a day, or 0.9 percent, revised down from 840,000 last month, the Organization of Petroleum Exporting Countries said in its Monthly Oil Market Report today. Demand will rise to 89.66 million barrels a day in 2013 versus 88.87 million last year, OPEC estimated. The group’s output fell in March as Nigeria, Iran and Kuwait pumped less.

OPEC, which supplies about 40 percent of the world’s oil, produced 30.19 million barrels of crude a day last month, according to OPEC estimates based on secondary sources. That compares with 30.29 million in February.

Saudi Arabia, the world’s largest crude exporter, increased output to 9.12 million barrels a day in March from 9.08 million the previous month, OPEC said.



Bears Reign Supreme

Last week we asked Bespoke readers to complete our April market survey, and over at Bespoke Premium, we have just sent out our full analysis of this month’s results.  As shown below, a large majority of survey participants expect the S&P 500 to be lower one month from now. This is surprising given the market’s recent run to new highs, but it’s nothing new.  Throughout this entire bull run over the last few years, investors have been loathe to get long equities.

High five  But, as Bill Hardison (via Doug Short) notes, investors may say something but what counts is what they are doing.

The following chart shows margin debt levels in all accounts and is reported at the end of each month (with a lag). To make it an easier comparison with market data for Excel, the data point for the S&P 500 each month is, somewhat arbitrarily, a 5 day moving average of price on the last trading day of the month. Data for the amount of margin debt is only available through the end of February, though I extended the S&P data by one additional month to show it as of the end of March, thus including the new all — time high for the S&P.


What this chart is showing is that, despite the lack of participation in the rally that you hear about, account holders are acting so bullish that they have a near — record amount of margin debt. The actual record debt level (3.9% higher than now) occurred at the end of July 2007, about two months prior to the actual market peak. Surprised smile

Fingers crossed  Seoul on alert as N Korea moves missiles US commander reports movement of weapons


NEW$ & VIEW$ (20 MARCH 2013)

Cyprus. Tax on deposits. Eurozone construction drops. Strong U.S. employment, housing, trucking. Restaurants take the brunt. China weakness continues in March. Sentiment watch.


Cyprus Rejects Rescue Plan

Cyprus’s parliament rejected its government’s bailout deal with the euro zone without a single vote in its favor, a move that could hasten the potential collapse of its banks and send the tiny island nation hurtling out of the euro zone. (…)

What happens next isn’t clear. A senior European official said after the vote that the euro zone would continue to wait for a counterproposal from Nicosia, outlining how it would raise the €5.8 billion it needs in order to secure the €10 billion bailout it had agreed upon with the euro zone and the International Monetary Fund.

Apart from negotiating the rescue deal, the government has been working on a Plan B that would involve support for its banks from Russia, a longtime friend of the country and the largest source of foreign deposits in Cyprus’s banks. Cypriot officials were planning to offer Russia stakes in energy projects and banks, two officials familiar with the situation said. The Cypriot finance minister is due to meet with his Russian counterpart in Moscow on Wednesday.

JPMORGAN: Cyprus Could Still Default, And The Market Is Underestimating The Risks

(…) As White explains, this leaves Cyprus with no good options at this point. They still have three less-than-good options, but all are wrought with serious problems.

The first option is to remove the levy on insured depositors and shift the entire burden of it to uninsured depositors – those with over 100,000 euros in their accounts. However, in order to get to the total 5.8 billion euros, the levy on uninsured depositors would have to be hiked to 15.4 percent.

This is a problem, because a significant portion of those uninsured deposits come from moneyed Russian interests looking to use the Cypriot banking system as a tax haven.

“There is some possibility that Russia would respond to a larger haircut by refusing to roll its existing €2.5bn loan to Cyprus; meaning that this option would still leave a significant shortfall,” says White. “In such a scenario, either the haircut on uninsured deposits would need to be around 21.8%, or further Troika funding would need to be found.”

The second option, then, is to go straight back to the EU for additional support. However, given the ostensible reason that the EU asked Cyprus to chip in to the bailout so much to begin with – a looming German federal election in September – White says it’s unlikely that German politicians will be interested in any sort of “U-turn.” In fact, going back to the EU could make things worse if EU leaders manage to further complicate the situation.

The third option is to go with a more progressive levy. One proposal is to subject depositors with less than 100,000 euros in their accounts to a smaller levy – 3 percent from 6.75 percent – while making those with between 100,000 and 500,000 euros pay 10 percent, and those with more than 500,000 euros pay 15 percent.

This probably won’t do much to appease those offended by this idea of deposit expropriation, meaning a plan like this might not make it through parliament either. (…)

White writes there are also longer-term implications for the whole euro zone, though (emphasis added):

We do not expect short-term bank runs or direct contagion, Near-term impacts on bank equity have been relatively limited so far (mostly in the 4% range). However depositors will now be aware that they are effectively taking a significant credit risk when they leave funds in weak banks backed by weak sovereigns – and there is a good chance that rates may need to rise in the periphery to reflect this increased perceived risk (indeed, we believe this action hints at broad risks for anyone with capital in a fiscally stressed country). The long-term implication for bank funding in the periphery is not a positive one, in our opinion, and by implication, there could be impacts on the supply of credit. Effectively, this would appear to work directly against the objectives of Banking Union, which is designed to ensure that a Euro in a Cypriot bank can ultimately be treated in the same way as a Euro in a German bank.

NBF Financial has this other angle:

According to the most recent data, the country is home to the second largest shadow economy in the Euro zone. As today’s Hot Chart shows,
the equivalent of 26% of GDP is accounted by  “economic activities and the income derived thereof that circumvent or avoid government
regulation or taxation”. That compares to an OECD average of 16% (and 11.5% in Canada). Under these circumstances, there is nothing automatic in committing other countries’ taxpayer money for bailouts within the
monetary union.


Ninja  The idea of taxing deposits is spreading:

Hacienda confirma que pondrá un tipo “moderado” a los depósitos bancarios (El Pais)

The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type “moderate” tax on bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate. This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits.

“The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits,” said the minister, adding that this kind “will not be much higher than 0%” .

Lightning  Euro-Zone Construction Output Falls Sharply

Output in the euro zone’s construction industry fell sharply in January, wiping out a modest improvement in December and adding to signs that the bloc is heading for another quarter of economic decline.

(…) construction output in the 17 nations that use the euro fell 1.4% in January from December, and 7.3% from the corresponding month a year earlier.

Tuesday’s figures showed construction output rising 3.0% from the previous month in Germany, but falling 4.0% in France.



Smile  Companies Open Up to Outsiders

A survey of large companies show that firms plan to increase hiring this year.

When asked about their hiring plans for the coming year, respondents said they plan to increase hiring in the U.S. by 17.5%, compared with 2012. In 2012, they said, they hired 8.6% fewer employees than in 2011. “This is the biggest upswing I’ve seen in ten years,” Crispin said.

Sun  Single-Family Homes Drive Housing Starts

Construction of single-family homes in the U.S. rose 0.5% in February to a rate of 618,000 units, a nearly five-year high. Overall housing starts increased 0.8%.

Overall housing starts rose 0.8% in February to a seasonally adjusted annual rate of 917,000, the Commerce Department said Tuesday. January’s figures were revised upward to a rate of 910,000.

Meanwhile, the number of new building permits, an indication of future construction, rose 4.6% to an annualized level of 946,000 in February, also the highest level since June 2008.

Raymond James housing analyst adds:

The annualized pace of single-family permit activity has shown consistent improvement since last March, and, based on our recent research, we believe order momentum and pricing power this spring are likely to exceed expectations. At this point of the up-cycle, land and labor availability remain key constraints on the pace of volume recovery; however, the major public builders are seeing a surprising level of pricing power as demand emerges.

ISI’s own homebuilders survey has kept rising in March, in contrast to NAHB which declined.

Smile  ATA Truck Tonnage Index Edged Higher In February


The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.6% in February after increasing 1% in January. (The 1% gain in January was revised down from a 2.4% increase ATA reported on February 19, 2013.) Tonnage has now increased for four straight months, which hasn’t happened since late 2011. Over the last four months, tonnage gained a total of 7.7%.

Compared with February 2012, the SA index was up a solid 4.2%, just below January’s 4.6% year-over-year gain. Year-to-date, compared with the same period in 2012, the tonnage index is up 4.4%. In 2012, tonnage increased 2.3% from 2011.

Surprised smile  Americans Cut Restaurant Spending as Taxes Bite

Sales at casual-dining establishments fell 5.4 percent last month, after declining 0.6 percent in January and 1.6 percent in December, according to the Knapp-Track Index of monthly restaurant sales. This was the first three months of consecutive declines in almost three years, with consumers caught in a “very emotional moment,” said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970. (…)

Although casual-dining sales took the biggest hit in February — down 4.9 percent — the weakness was broader, according to “channel checks” conducted by RBC. Fast-food fell 0.1 percent, the worst in two years; revenue growth at so-called fast-casual eateries, up 0.6 percent, was the lowest in three years, the data show.

U.K. Data Delivers Blow Ahead of Budget  Just hours ahead of the U.K. budget, Chancellor of the Exchequer George Osborne was dealt a blow as data showed unemployment rose for the first time in a year and average earnings growth fell to the lowest in over three years.

The Office for National Statistics Wednesday said the official, international measure of unemployment rose 7,000 in the three months to the end of January to total 2.52 million. That meant the unemployment rate held steady at 7.8% from the three months to December.

The last time unemployment increased was in the three months to January 2012. The ONS figures showed the increase was entirely due to a rise in unemployment among 18- to 24-year-olds, which reached a 17-month high.

imageAdding to the bad news, earnings growth fell, which means the squeeze on consumers’ pay packets tightened.

Average weekly earnings excluding bonuses—the measure which includes bonuses can cause steep fluctuations in monthly changes payments—rose 1.2% in the three months to January. That was the lowest increase since the three months to December 2009 and is down from a 1.3% rise between October and December last year.

Consumer price inflation stood at 2.7% in January and rose to a 10-month high of 2.8% in February. (Chart from Markit)


CEBM Research’s mid month survey points to weakness

  • More than 64% of (steel industry) respondents thought actual sales were lower than their expectations, worse than the previous survey. Moreover, almost 30% of respondents were pessimistic toward the recovery of the steel market in the future and only 8% thought an improvement would come soon.
  • Most construction machinery dealers surveyed mentioned that sales in the first half of March declined significantly on Y/Y basis, while about 1/3 of respondents expect flat or growing sales in March. Overall, we believe that sales of excavators in March will decline about 15% to 20%, lower than our expectations.

That goes against the not very reliable Conference Board LEI for China which rose 1.3% in February with 5 of the 6 index components contributing positively.

The PBoC Banking Climate Index rose 0.7%  in Q1’13 with a 6.3% gain in the loan demand index.


Larry Fink: Cyprus Not an Issue, Sees 20% U.S. Stock Gain

Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, said Cyprus is not a major problem and U.S. equities will rise 20 percent this year as the economy rebounds. (…)

“Depending on the economic information that we receive, we can be in the beginning of a 5 percent correction or we’re going to be in a probably prolonged one- or two-month pause, which I don’t mind. But I would say by year-end equity markets are going to be much higher.”


NEW$ & VIEW$ (12 MARCH 2013)

U.S. retail sales. Employment trends. Small biz mood. Foodstamp recipients hit record. OECD leading indicators. Eurozone woes continue. Taxation migration. Sentiment watch. Pension tensions.

Fingers crossed  U.S. Retail Sales Hanging In

Weekly chain store sales have increased in each of the last 4 weeks after their 6-week collapse early this year. The Y/Y growth rate keeps falling, however, due to the strong 2012 base.



Retailers are likely to report pretty weak results for Q1 but the weekly trends are suggesting that American consumption is not collapsing.

Employment Trends Index Rose in February to Highest Level Since June 2008

The Conference board said its February employment trends index increased to 111.14 from a revised 109.93 in January. The January figure initially was reported as 109.38.

The latest index is up 3.2% from a year earlier and is now at its highest mark in nearly five years.

Small Biz Employment Picking Upimage

Even though sales and mood not much better:



Foodstamp Recipients Hit Record

According to the USDA, an all time high of 47,791,966 Americans closed 2012 in possession of the highly desired Electronic Benefits Transfer (EBT) card, managed by who else but JPMorgan. And with a civilian non-institutional population of 244.4 million in December, this means that a record 19.56% of eligible Americans are on Foodstamps.

In December an additional 109,924 Americans became reliant on foodstamps for their poverty-level needs, bringing the total to 47.8 million.


Following is directly from the OECD. I don’t agree with all their comments. Particularly worrisome is that only the U.S., Japan (!) and the U.K. (!) appear to be firmly growing. Economic momentum is fading fast in China, Brazil, India and Canada.

In the United States and Japan, the CLIs continue to point to economic growth firming. In the Euro Area as a whole, and in particular Germany, the CLIs point to a pick-up in growth. The CLIs for Italy and France point to no further declines in growth.

The CLI for United Kingdom points to growth close to its long term trend rate but with a slowing momentum. In Canada the CLI continues to point to weak growth.

In China, India and to a lesser degree in Brazil the CLIs point to growth below trend. In Russia however, the CLI points to growth picking up.




Regarding Europe, read on:

Euro Zone Shows Signs of Pickup

The euro-zone economy appeared to pick up steam in January, with official data from Germany showing a modest rebound in exports from the region’s biggest economy.

Exports rose 1.4% in January from December, the strongest performance since August, and were up 3.1% from January 2012. That was the biggest increase since October and was based on strong orders from countries outside the euro zone.

High five  This is from the rear-view mirror. Recall that just last week: German Factory Orders Unexpectedly Decline

Orders, adjusted for seasonal swings and inflation, decreased 1.9 from December, when they rose a revised 1.1 percent, the Economy Ministry in Berlin said today. In the year, workday- adjusted orders dropped 2.5 percent. (…)

Factory orders from the euro area slumped 4.1 percent in January, driving a 3 percent decline in export demand, today’s report shows. Domestic sales dropped 0.6 percent. Orders for intermediate, investment and consumer goods all fell. December orders were revised up from an initially reported 0.8 percent increase.

Germany exports about 40 percent of its products to the euro area.

And today’s WSJ adds:

French factory output dropped further than expected in January as manufacturing output sank, figures from national statistics bureau Insee showed Monday. Industrial production in the euro zone’s second-largest economy fell 1.2% in January from December. (…)

In Italy, the statistics office said it has reduced its reading of the economy in the fourth quarter, showing a 2.8% year-on-year fall in GDP instead of the 2.7% drop originally reported. Output in quarter-on-quarter terms was left unrevised to show a 0.9% fall, the sixth contraction in a row.

Greece’s economy shrank 5.7% in year-to-year terms in the fourth quarter, a shallower contraction than the 6.0% fall originally reported, its statistics agency said.

Portugal’s statistics agency confirmed the economy shrank 1.8% in the fourth quarter from the third quarter, its ninth straight decline. Output was down 3.8% in annual terms.

Top executives join France exodus

Two senior executives at Moët Hennessy, the champagne and cognac arm of the LVMH luxury group, are moving to London from Paris and the head of Dassault Systèmes, the software arm of Dassault Aviation, said some senior managers of his company had left and he was considering following suit.

Don’t be too quick to laugh at the French:

Paulson eyes Puerto Rico tax haven move
Billionaire New Yorker looks to shield wealth

According to Bloomberg, which first reported Mr Paulson’s exploration of the possible move, 10 wealthy individuals have already located to Puerto Rico to take advantage of the tax break, and 40 more are in discussion with the government.



The S&P 500 has averaged a 21% gain during the fifth year of previous bull markets, he says, which amounts to the second biggest yearly gain within the first five years of a bull market. (WSJ) Confused smile

SEC Says Illinois Hid Pension Troubles

llinois settled SEC civil-fraud charges that the state misled municipal-bond investors by failing to adequately disclose the risks of its underfunded pension system.

[image]The action also shows in detail how political decisions left the state with only 40 cents of assets for every dollar of pension liabilities—a financial hole Illinois officials are now scrambling to fill. (…)

Most states comply with governmental accounting standards, which “Illinois did not follow,” Elaine Greenberg, head of the SEC’s municipal securities and public pensions unit, said in an interview. “But the SEC cannot order a state to follow any particularly methodology.” (…)

The state’s five public-employee pension plans manage the retirement benefits for clerical workers, teachers, judges, college professors and lawmakers. Collectively, their funding level stands at 40%. Nationally, the average funding level is about 75%. (…)

The problems date back to 1994, when Illinois lawmakers passed a funding plan that would allow the state to amortize, or spread the pension costs, over 50 years. Most pensions use a 30-year amortization period.

State officials also ignored the common practice of calculating contributions to the plans based on what is known as the “Actuarially Required Contribution.”

Instead, Illinois left it to lawmakers to decide how much to contribute to the funds each year.(…)


NEW$ & VIEW$ (21 DECEMBER 2012)


The Mayans Predicted This Stock Sell-Off, You Know


Boehner’s ‘Plan B’ Fails

House Speaker Boehner, facing a rebellion in his party, abandoned his plan to avert tax increases for most Americans, throwing budget negotiations into disarray and bringing the prospect of tumbling over the fiscal cliff into sudden focus.

After pulling his bill without taking a formal vote, Mr. Boehner unexpectedly disbanded the House until after Christmas, leaving behind uncertainty about whether Congress and President Barack Obama would be able to avoid $500 billion in spending cuts and tax increases that begin in January.

House Republicans’ refusal to go along with Mr. Boehner’s tax plan represents a rebuke to the speaker that raises questions about his ability to lead his party in further budget negotiations with Mr. Obama. Negotiations between the White House and Mr. Boehner are at a standstill. (…)

White House press secretary Jay Carney said the president will pursue with Congress a budget deal, one that would prioritize extending current tax rates for households making under $250,000 a year.

The Senate is expected to be in session Friday, then recess until Thursday Dec. 27. (…)

“I did my part. They’ve done nothing,” said Mr. Boehner. “Frankly, I’m convinced that the president is unwilling to stand up to his own party on the big issues that face our country.” (…)

Teetering on the Cliff (WSJ)

(…) To put this in raw political terms, Mr. Boehner offered to break a core GOP principle on taxes and Mr. Obama offered him nothing he could take back to his rank-and-file in return. Mr. Boehner is a political leader, not a dictator, and he needs to persuade Members, not beat them into submission.

(…) (Obama) has treated the talks as an extension of the election campaign, traveling around the country at rally-style events at which he berates Republicans for not accepting his terms of surrender. Grant gave Lee more at Appomattox. (…)

The best scenario for the economy now would be for Mr. Obama to offer to extend all the tax rates for six months and start negotiating anew in January. That would give everyone the chance to decompress and back down from the barricades.

The alternative is a de minimis deal, perhaps negotiated in the Senate, that lessened some of the tax-increase damage and then the House might follow. But that still means a big tax increase and months of trench warfare on spending. The media can revel in the GOP’s woes, but the buck still stops with the President.

Enjoy the Republicans’ debacle, but don’t read too much into it  (Washington Post)

(…) what comes next depends on what the House leadership learned from this debacle. It could be that they have some 125 or so members perfectly willing to vote for a major deal; if so, the deal that Obama and Boehner were reportedly close to earlier this week could wind up returning even before January 1. Or it could be that what liberals have been saying all along turned out to be true: A plan with an identical result will count to the people who matter in the GOP as a dreaded tax increase if it’s done now, but suddenly it will count as a tax cut if it’s done after Jan. 1, when the current tax rates expire. Confused smile

If that’s the case, we’re going over the cliff, but a deal could be reached and pass in early January. Or, finally, it could be that what Republicans really want is to never take a vote to confirm the next tax rates, and would rather (as was suggested a while ago) just allow the Senate bill (which would raise rates only for households making over $250,000) to pass — if necessary by voting “present” and letting Democrats supply the votes. 

All of these outcomes were plausible before; all that’s changed is the GOP got (another) black eye, and — perhaps — the leadership learned more about the preferences of Republican members. 

The bottom line remains that some sort of bill to prevent middle-class taxes from going up and the sequester going ahead — as well as renewing the AMT patch and the Medicare “doc fix” – is virtually certain sooner or later, on slightly better or worse terms. This isn’t like when a party is trying to pass a bill which, if it fails, just goes away. And it’s not even, at least in my view, something with a firm deadline and immediate, devastating, consequences; this won’t lead to a government shutdown.

So I won’t predict the next step, but other than everyone having good fun at the expense of the House Republican leadership — and no question, Boehner and the rest deserve it — it’s just not clear that tonight’s fiasco will change anything.

What now, Mr. President?

Smile  Consumer Spending Rebounds as Incomes Rise

Personal consumption expenditures—which measure purchases ranging from cars and clothes to health care and travel—increased 0.4% in November, the Commerce Department said Friday.

When inflation is factored in, consumer spending rose 0.6% in November after falling 0.2% in October.

Personal incomes, meanwhile, rose 0.6% in November, the biggest jump in nine months.

The Commerce Department Friday said that the price index for personal consumption expenditures, the Fed’s preferred gauge for inflation, increased 1.4% year-over-year in November. The Fed targets a level of around 2%.

On a monthly basis, the index fell 0.2% as energy prices tumbled. The price index for energy goods and services was down 4.4%.

The closely watched core PCE index, which excludes volatile food and energy prices, rose 1.5% on a year-over-year basis in November.

Smile  Existing-Home Sales Climb

Existing homes sold at a seasonally adjusted annual rate of 5.04 million units in November, the National Association of Realtors said Thursday. That marks a 5.9% gain from the previous month and a 14.5% increase from one year ago. (Chart from Haver Analytics)

Pointing up The number of homes for sale fell from one year ago to 2.03 million, which is the lowest level since the end of 2001.

[image]Condominium sales, which were hit hard during the housing slump amid heavy overbuilding, were up by 33% from one year ago, driven by higher sales in the South, particularly in Washington, Atlanta and Florida. Condos, which have accounted for around 10% of all home sales this year, are “beginning to catch up” with other gains in the single-family market, said NAR Chief Economist Lawrence Yun.

Prices in October rose by 0.5% from September and by 5.6% from one year ago, according to a separate report Thursday by the Federal Housing Finance Agency. That was the largest year-over-year gain since 2006.

Distressed homes accounted for 22% of November sales (12% were foreclosures and 10% were short sales), down from 24% in October and 29% in November 2011. Foreclosures sold for an average discount of 20% below market value in November, while short sales were discounted 16%.

First-time buyers accounted for 30% of purchases in November, down from 31% in October and 35% in November 2011.

All-cash sales were at 30% of transactions in November, up slightly from 29% in October and 28% in November 2011. Investors, who account for most cash sales, purchased 19% of homes in November, little changed from 20% in October; they were 19% in November 2011.


Overall orders for durable goods were up 0.7% last month from October to a seasonally adjusted $220.94 billion, Commerce said. Orders in October rose a revised 1.1%.

Declining demand for civilian and defense aircraft last month were offset by more orders for machinery and motor vehicles and parts.

A key measure of business investment—nondefense capital goods orders excluding aircraft—rose 2.7% in November.

Excluding transportation, November orders were up 1.6%.

Excluding defense, durable orders rose 0.8% in November.

Unfilled orders, a sign of future demand, increased 0.1%. Shipments of durable goods rose 1.5%, while inventories were up 0.2% in November.


Conference Board Leading Economic Index: Six-Month Growth at Zero

The Leading Economic Indicator index from the Conference Board declined 0.2% during November following a 0.3% October gain, initially estimated at 0.2%. Fifty percent of the component series had a positive influence on the index last month. A steeper interest rate yield curve, more building permits, a longer workweek and the leading credit index had the largest positive influences. These were offset by more initial claims for unemployment insurance, lower stock prices, a lower ISM new orders index and lower consumer expectations for business & economic conditions.

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Canadian inflation falls to lowest level in 3 years

Statistics Canada says the pace of annual inflation fell sharply last month to the lowest level more than three years.The agency says prices were up 0.8 per cent year-to-year in November, down from 1.2 per cent increases in each of October and September.

Core inflation slowed to 1.2% from 1.3%.


The Index dropped from 53.8 in November to 52.2 in December but ISI’s seasonal adjustment shows an actual jump from 52.2 to 58.0.


NEW$ & VIEW$ (12 NOVEMBER 2012)

Much to deal with: earnings, valuation, politics. Make sure to read the “oil” part.


Nearing the end of the earnings season. S&P says that of the 451 companies having reported, 63% beat and 24% missed. The biggest beats were in Health Care where 79% beat. Excluding these, the beat rate drops to 61%.

EPS keep sliding and are now seen reaching $24.40, down 3.5% YoY, bringing trailing 12-month EPS to $97.80, down 0.9% from their June 30 level. Revenues are up 1.7% YoY, in line with Q2’s +1.8%. Margins are 9.02% down from 9.5% in Q2 and Q311.

Q4 estimates also keep being revised downward. They are now $25.96, up 9.4% YoY. Q4 estimates have been shaved nearly $1.00 in the last 3 weeks. Factset calculates that almost 40% of last week’s earnings revisions were accounted for by the Insurance industry post Sandy.

Of the 86 companies that have issued EPS guidance for the fourth quarter, 62 have issued projections below the mean EPS estimate and 24 have issued projections above the mean EPS estimate. Thus, 72% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the long-term average (61%), but it is below the percentage recorded in the previous quarter at this same point in time (80%).

Of the 24 companies that have issued EPS guidance since October 29, seven have mentioned the negative impact of Hurricane Sandy in their earnings release or conference call.

U.S. equities remain in deep undervalued territory per the Rule of 20. Earnings are not collapsing, however, providing some downside protection for now. The next few weeks will likely be volatile given the looming fiscal cliff debate in the U.S. and continued serious economic and financial problems in Europe.


Bespoke Investment tallies all NYSE companies:

(…) the current earnings beat rate stands at 59.7%.  After hitting a high of 61.8% on Monday, the beat rate dropped each consecutive trading day to close out the week below 60%. 





Obama, Boehner Open to Bargain  Obama and Boehner hinted compromise is possible, in a bid to defuse tensions before talks next week to avert a fiscal crisis.

[image]Mr. Obama, in his first statement on the fiscal cliff since winning re-election Tuesday, said any deal must include tax increases on “the wealthy.” He also called on the House to immediately pass a Senate bill that would extend the Bush-era tax cuts on household income under $200,000 a year for individuals and below $250,000 for couples. (…)

The following was widely quoted this weekend:

White House press secretary Jay Carney, responding to questions after the president spoke, said Mr. Obama would veto any legislation that extends the Bush-era tax cuts for the top 2% of American income earners.

But this next, important, part was often omitted:

At the same time, he didn’t rule out extending the rates if they were linked to raising revenue from wealthy people by eliminating deductions. (…)

Obama is also apparently open to changes in Medicare and Medicaid.

Mr. Obama also signaled that a deal would include changes to entitlement programs such as Medicare and Medicaid, but he didn’t mention Social Security. (…)

Mr. Boehner said Friday he is open to a deal that raises tax revenue but not rates, leaving open the possibility for a compromise that includes limiting or eliminating tax deductions or other tax breaks for those families. (…)

Hmmm…If these are more than mere words (Fingers crossed) , this might not be a repeat of the miserable 2011 debt ceiling standoff episode.

Senate minority leader Mitch McConnell, interviewed by the WSJ’s Stephen Moore::

“Let me put it very clearly,” says the five-term Republican senator from Kentucky. “I am not willing to raise taxes to turn off the sequester. Period.” (…)

“Look, he may think it would be helpful to his presidency to continue to divide and demonize us,” says Mr. McConnell. “But my answer will still be short and firm: No. We won’t agree to any tax increases that will hurt the economy.” (…)

Republicans are willing to be “flexible” on raising revenues but, he hastens to add, only “in the context of broad-based, comprehensive tax reform.” He’s open to prying more out of the rich by closing tax loopholes. But he and his caucus of 45 Republicans want lower, not higher, rates. (…)

The other unresolved mega-issue is what to do about the scheduled sequester cuts of $110 billion for 2013, half coming from defense and half from discretionary domestic programs. Much like the president, he wants to shut it off, but with a caveat: “I don’t think we should just forget about imagethe spending reductions we promised. We ought to achieve exactly the same amount of spending reductions,” with targeted cuts that the two parties have already agreed to. When pressed on whether he could live with the sequester, as some Republican budget hawks have suggested, the senator dismisses that drive-off-the-cliff option as “Thelma and Louise economics.” (…)

And what if the president insists on raising tax rates? Expect a principled stand by the minority leader and his fellow Republicans: “He’s got to understand he doesn’t fully control the Senate. He doesn’t control the House at all. In order to accomplish things for the country he will need to work with us.”

As Mr. McConnell walks me to the door, he adds: “You know, he doesn’t own the place.” (Image above from Scott Pollack for Barron’s)

Deficit Push Planned

The White House is planning an aggressive public campaign to build support for its proposal to reduce the deficit through tax increases and spending cut, a sharp contrast to its private talks with Republicans that faltered last year.

Mr. Obama’s new approach is in sharp contrast to his strategy last year, when he met privately with Mr. Boehner to try and craft a broad package of tax and spending changes to reduce the deficit. Now, Mr. Obama and his aides have promised to be much more flexible and seek outside ideas.

Mr. Buffett and his secretary will soon do politics again. Things could get nasty as this WSJ editorial shows:

The Hard Fiscal Facts

Individual tax payments are up 26% in the last two years.

(…) The feds rolled up another $1.1 trillion deficit for the year that ended September 30, 2012 which was the biggest deficit since World War II, except for each of the previous three years. President Obama can now proudly claim the four largest deficits in modern history. As a share of GDP, the deficit fell to 7% last year, which was still above any single year of the Reagan Presidency, or any other year since Truman worked in the Oval Office.

Tax revenue kept climbing, up 6.4% for the year overall, and at $2.45 trillion it is now close to the historic high it reached in fiscal 2007 before the recession hit. Mr. Obama won’t want you to know this, but this revenue increase is occurring under the Bush tax rates that he so desperately wants to raise in the name of getting what he says is merely “a little more in taxes.” Individual income tax payments are now up $233 billion over the last two years, or 26%.

This healthy revenue increase comes despite measly economic growth of between 1% and 2%. Imagine the gusher of revenue the feds could get if government got out of the way and let the economy grow faster. (…)

Even if Mr. Obama were to bludgeon Republicans into giving him all of the tax-rate increases he wants, the Joint Tax Committee estimates this would yield only $82 billion a year in extra revenue. But if growth is slower as a result of the higher tax rates, then the revenue will be lower too. So after Mr. Obama has humiliated House Republicans and punished the affluent for the sheer joy of it, he would still have a deficit of $1 trillion.

Most of our readers know all this, but we thought you’d like some new evidence to rebut the kids who voted for your taxes to go up when they return from college for Thanksgiving. Maybe they’ll figure it out when they have a job, if they can find one. Punk  (Winking smile)

US plays chicken on edge of fiscal cliff
Politicians on both sides are flirting with the idea of going over the cliff

The issue is not the percentage of spending taken out of the economy; it is the blow to confidence. Going off the cliff would be an emphatic indication that an election had done nothing to make Congress more willing to compromise.

Here’s the rosy scenario:

Hence forth his goal will be to secure his legacy as the president who not only introduced universal healthcare and decapitated Al Qaeda, but also pulled the US economy out of its deepest economic crisis since the 1930s and assured the Treasury’s long-term solvency.

He knows that he can only secure this legacy and avoid lame-duck status
by breaking the gridlock in Washington. These changing political calculations mean that a new willingness to compromise is virtually
guaranteed on both sides of the US political divide. With the job market
improving, the housing crisis largely over and the financial system returning to normal, President Obama and the Republican congressional
leaders will quickly realize that they have to work together and compromise if they want to claim any credit for the US economic recovery that lies ahead. (Gavekal)

What’s at stake?

Nancy Lazar, who along with Ed Hyman heads up International Strategy & Investment, writes that a deal next month for a one-year deferral of a big chunk of the cliff would still result in a $162 billion tax hike in 2013. Moreover, since it would hit Jan. 2, the brunt of it would be felt in the first quarter, during which ISI estimates that real disposable personal income would plunge at a 3.8% annual rate.

Without a deal, ISI estimates, heading over the cliff would slash real disposable income at a 10% annual rate in the first quarter; consumer spending would plummet at a 5% rate and plunge the economy back into recession. (Barron’s)

Gavyn Davies: The anatomy of the US fiscal cliff

There are five main elements in the composition of the cliff. To simplify information that has recently been published by the Congressional Budget Office, they are the following:

The CBO has also estimated the economic impact of each of the separate components of the cliff. This is what the results look like:

The overall impact on US GDP next year, if the entire cliff were to take effect, would be to reduce real GDP by 2.9 per cent, and reduce employment by 3.4 million jobs. No wonder the markets are worried.

During all this bickering:

Partisan fight over “fiscal cliff” will harm U.S. economy: Reuters poll  Any partisan squabbling over the United States’ looming budget crisis will harm its economy, according to a strong majority of economists polled by Reuters after Tuesday’s presidential election.

Keep in mind that all this is happening during the biggest shopping season of the year and just as companies finalize their 2013 budgets. Confused smile


Third Quarter GDP Looking Better, but May Be at Expense of Fourth Quarter Initially viewed as another lackluster period, the third quarter could turn out to be among the most robust economic advances of the current recovery.

After surprisingly positive reports on wholesalers’ inventories and the trade deficit this week, some economists are now forecasting that the gross domestic product increased at better than a 3.0% rate during the third quarter. The government initially pegged it as a 2.0% gain, but will use the latest data to revise the figure later this month.

Economic growth has only twice topped a 3.0% rate since the recovery began thirteen quarters ago. The economy hasn’t grown at better than a 3.0% clip for a full year since 2005.


  • Total construction spending has been rising.

FRED Graph

  • Even though public spending keeps falling.

FRED Graph

  • Private resid. has gained for 6 consecutive months.

FRED Graph

  • Private non-resid.has flattened out. More capex stimulus needed, real or political…

FRED Graph

Pointing up  Also: ISI’s economic diffusion index, which incorporates all the economic indicators they monitor each week. The index made a new high last week. Citigroup’s economic surprise index also made a new high last week.


From the state controller’s office:

October’s numbers on California’s financial condition showed the positive impact of the state’s economic recovery, with tax receipts surpassing both expectations and last year’s numbers. Total revenues of $5.0 billion were $208 million, or 4.4%, above estimates contained in the 2012-2013 State Budget and 19% above last year’s actual figure.




China’s Trade Surplus Widens

China’s trade surplus widened in October as export growth accelerated, the latest encouraging sign for the world’s second-largest economy.

China’s October exports rose 11.6% from a year earlier, faster than September’s 9.9% rise. Imports, however, rose a lackluster 2.4% from a year earlier, unchanged from September’s rise.

Exports to Europe fell 8.0% from a year earlier in October, showing that economic weakness there continues to weigh on demand for Chinese goods. Exports to the U.S., on the other hand, were up 9.1%.

Minister warns of grim trade situation  Chinese Commerce Minister warned of lingering pressure on the country’s foreign trade from weak global demand, rising domestic costs and growing trade protectionism.

(…) “The trade situation will be relatively grim in the next few months and there will be many difficulties next year,” Chen told reporters at a group interview on the sideline of the 18th National Congress of the Communist Party of China, which opened Thursday. (…)

He cited lack of fundamental improvements in global demand, rising production costs of Chinese labor-intensive industries and stronger protectionism sentiment as the main factors dragging down exports. (…)

Is this a real upturn?

An earlier survey from Markit, produced for HSBC, had signalled a similar upturn in manufacturing output, though even more encouraging was a strong rise in the new orders to inventory ratio, which acts as a leading indicator of production trends and suggests that the rate of growth of output will continue to improve in November.


Needless to say, the sharp drop in China CPI to 1.7% in October provides ample working room for Beijing, a luxury no other major country has nowadays. The biggest risk to China now is the U.S. fiscal cliff.


Industrial Output Falls Across Europe

Industrial production fell sharply in a number of European nations during September, an indication that the continent’s economy is on the brink of a sharp downturn.

(…) In its monthly note on the economic outlook, Germany’s finance ministry Friday warned that Europe’s largest national economy will weaken “noticeably” during the winter months as companies hold back on investments because of the euro zone’s fiscal and banking crisis.

“Overall, there will be a noticeably weaker economic dynamic in the winter half-year,” the ministry wrote. (…)

Siemens, the German engineering group that is a bellwether for the European economy, Thursday said the value of orders fell 4% in the three months to Sept. 30. The company, whose products range from power equipment and high-speed trains to washing machines and medical scanners, said new orders in Germany fell 44% from a year earlier. For all of Europe including Russia and its neighbors, Africa and the Middle East, orders fell 5%. (…)

In France, figures released Friday showed industrial production fell 2.7% from a month earlier, while in Italy production fell by 1.5% in seasonally-adjusted terms. The data followed the release of figures Wednesday that showed industrial production in Germany fell by 1.8%, and figures from Ireland Tuesday that showed output fell by a staggering 13.9%. (…)

Figures also released Friday showed output in Sweden was down 4.1% in September, while in Hungary output dropped by 3.8%, despite a pickup in the manufacture of automobiles.

Germans show they mean it:

Germany agrees to cut spending  Economics ministry warns of further slowdown

It will reduce total spending by 3.1 per cent to €302bn, compared with the expected outcome in the current year, and cut the budget deficit from €18.8bn to €17.1bn, thanks largely to increased tax revenues and reduced social security costs. Mug

Japan edges towards 5th recession in 15 years
Economy contracted annualised 3.5 per cent in Q3


India’s Industrial Output Shrinks, Trade Gap Widens

Industrial output contracted 0.4% from a year earlier in September, hurt by the poor performance of the manufacturing sector, government data showed Monday. The government also downwardly revised the output reading for August to a 2.3% expansion from 2.7% reported previously. (…)

Factory output has shrunk in five of the seven months through September as high interest rates eat into demand and slow policy reforms hurt investor confidence. Economic growth in India has slowed to its weakest in nearly a decade. (…)

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said the economy could expand 5.5%-6.0% this fiscal year. It grew 6.5% last year, the weakest pace in nine years.

Singh promises second wave of reform
Indian PM vows to reverse slowdown in economy

India’s prime minister has pledged to follow up his recent burst of economic reforms with more measures to restart stalled infrastructure projects, attract foreign investment and reverse the slowdown in Asia’s third-biggest economy.

Manmohan Singh defended plans to attract capital from abroad, while admitting that India’s precarious public finances needed more international money to plug a growing gap between imports and exports.

Russian Third-Quarter GDP Grew 2.9%, Slowest Since 2010 Rebound

“The main reason for the slowdown is obviously agriculture, as the harvest has been worse this year,” Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, said before the release. “The second point is a certain deceleration in industry, and more so in mining than in manufacturing.”


Composite Leading Indicators (CLIs), OECD, November 2012

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue to point to weak growth prospects in many major economies, but signs of stabilisation are emerging in Canada, China and the United States.

Compared to recent months where the CLI has pointed to a deteriorating outlook, tentative signs of stabilisation are also emerging in Italy.

The CLIS for Japan, Germany, France and the Euro Area as a whole continue to point to weak growth. In India and Russia the CLIs also continue to point to weak growth. The CLIs for the United Kingdom and Brazil continue to point to a pick-up in growth.



Airplane  Another “down-to-earth” viewpoint:

Cathay Pacific Sees Little Christmas Cheer for Air Cargo


Cathay Pacific Airways Ltd. , the largest carrier of international air cargo, said it has seen only a small increase in freight ahead of the Christmas shopping season, prolonging an 18-month downturn in industry volumes. (…)

The cargo slump “tells you just how pessimistic people are about the economic outlook overall,” said Andrew Herdman, the head of the Association of Asia-Pacific Airlines. “There’s no growth expectations.”

The group’s 15 member-airlines suffered a 3.2 percent drop in cargo volumes in the first nine months of the year, according to data on its website. The proportion of cargo capacity filled with freight dropped 0.5 percentage point in the period to 66.2 percent.

Singapore Airlines Ltd.  said Nov. 3 that it will park one of its 13 Boeing Co. 747 freighters for more than a year starting in January after losses at its cargo unit tripled in the quarter through September. Asiana Airlines Inc., South Korea’s second-biggest carrier, may consider returning its leased freighter if there’s no improvement in volumes, CEO Yoon Young Doo said at the Kuala Lumpur meeting.


US set to become biggest oil producer
IEA report highlights impact of shale revolution

The US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape.

Pointing up  This marks the first time the IEA, the developed world’s most respected energy forecaster, has made such a prediction. It underscores how the drilling boom that has unlocked North America’s vast reserves of hard-to-get-at oil and gas is changing the world’s oil balance.

In its yearly world energy outlook, published on Monday, the IEA said that by 2030 “the US, which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy-importing countries”. (…)

The increase in US domestic production – of biofuels such as ethanol as well as unconventional “tight” oil – comes as new fuel-efficiency measures in transport imposed by the first Obama administration are set to reduce oil demand sharply. That will lead to a big fall in oil imports into the US, which the IEA says will plunge from 10m barrels a day to 4m b/d in ten years’ time. The agency says that North America will become a net oil exporter by about 2035.

“The US, which imported a substantial chunk of oil from the Middle East, will be importing almost nothing from there in a few years’ time,” Fatih Birol, the IEA’s chief economist, told the Financial Times. “That will have implications for oil markets and beyond.” (…)

The US Energy Information Administration expects production will rise from 6.3m b/d this year to 6.8m b/d in 2013 – its highest level since 1993. (…)

In its outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase. In contrast, energy demand would “barely rise” in the leading industrialised countries. Global oil demand would reach 99.7m b/d in 2035, up from 87.4m b/d in 2011. (…)

Pointing up However, those projections are based on an extrapolation of the dramatic growth in shale oil production in recent years, which some analysts see as implausible, or at least uncertain.

Related: Facts & Trends: The U.S. Energy Game Changer

BUY LOW, SELL HIGH CHART  They don’t get much better than that (chart from Moody’s).



(…) , emerging & developing economies have seen their official holdings of gold rise to 200 million troy ounces for the first time ever this year. Still, despite a 44% increase in such holdings since 2007, the share of gold in total official reserves remains at a paltry 4.3%. As shown this compares to a share of nearly 24% in the advanced economies.

Given the current environment of surging sovereign debt in the U.S. and the Eurozone (whose government bonds account for the bulk of emerging markets’ official reserves) we think that the central banks of
emerging economies are likely to increase their exposure to bullion to guard against possible currency depreciation. (NBF Financial)


Surprised smile  No hold back in this buy-back

Coca-Cola (NYSE:KO) announced a plan to buy back an eye-popping 500 million shares, or approximately $18.9 billion, of its stock.


NEW$ & VIEW$ (11 OCTOBER 2012)

Composite Leading Indicators (CLIs), OECD, October 2012  The U.S. remains the lone grower. For how long can it sustain growth when everybody else is slowing?




Sarcastic smile  U.S. EMPLOYMENT: Think about that (US Eco Q4’12 Outlook from Bloomberg Briefs)



Danielle Park (Juggling Dynamite) quotes John Hussman (tks Ian)

And even if we take the recent employment report at face value, the year-over-year growth in non-farm payrolls is presently just 1.37%, and we’ve never yet seen a decline in payroll growth below 1.4% year-over-year except during or just prior to U.S. recessions [see chart below].


Bowl   WEALTH EFFECT!  Plate

Core inflation appears tame but total inflation remains resilient in spite of the severe worldwide economic slowdown. Rising commodity prices have a more limited impact on discretionary spending in the richer developed countries but are a big deal elsewhere. The impact that rising food prices have on purchasing power is surprisingly high even in countries such as France, Italy, Spain and Japan.



Lightning Spanish Bond Yields Rise

Spanish government bond yields climbed and the country’s benchmark equity index fell after Standard & Poor’s downgraded the nation’s credit rating to just above junk status.

With Moody’s Investors Service already assessing Spain’s credit-worthiness at its lowest investment level, the country is a step closer to losing its membership in key bond indexes, which could in turn prompt selling of the nation’s bonds, push yields even higher and force the government to seek a bailout.

In European morning trading, the Spanish 10-year government bond fell, driving the yield up 0.10 percentage point from Wednesday’s closing level to 5.87%, after having touched 5.90% earlier in the session. Same-maturity debt of Italy, which is also struggling with a financial crisis, increased 0.05 percentage point to 5.14%, according to Tradeweb.



Then that:

Clock  Lagarde Urges More Time For Greece, and Spain. Christine Lagarde said Greece should be given an extra two years to meet its budget targets, publicly wading into the politically sensitive bailout discussions under way.

“That is what I have advocated for Portugal, this is what I have advocated for Spain, and this is what we are advocating for Greece, where I said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation programme that is considered.”

Lightning  Greek unemployment scales new high

Unemployment rose for a 35th consecutive month to 25.1 per cent in July, more than double the euro zone average and up from a revised 24.8 per cent in June, Greece’s statistics service ELSTAT said on Thursday. (…)

A record 1.26 million Greeks were without work in July, up 43 per cent from the same month last year.

Airplane  Greece’s biggest company quits for Switzerland

Greece’s biggest company is leaving the country, drinks bottler Coca Cola Hellenic said on Thursday in announcing it will move to Switzerland and list its shares in London, dealing a blow to the debt-crippled Greek economy. (…)

“This transaction makes clear business sense,” chief executive Dimitris Lois told analysts in a conference call. An overwhelming majority of shareholders have already accepted moving a company which has long complained about Greek taxes.

(…) which follows Greek dairy group FAGE this month in seeking a low-tax, low-volatility haven for its corporate base – in FAGE’s case Luxembourg. (…)

Pointing up  A Evans-Pritchard: IMF fears ‘credit shock’ in Spain if Rajoy blocks rescue

(…) The IMF said capital flight from Spain reached €296bn (£238bn) in the 12 months to June, or 27pc of GDP. It matches the intensity of “sudden stop” crises seen in emerging markets.

Banks in Spain, Italy, and the EMU fringe cannot easily make up the shortfall by turning to the ECB because they are short of usable collateral.

The biggest risk is that Europe’s banks will have to slash balance sheets by €4.5 trillion by the end of 2013, largely concentrated in the Club Med bloc.

The fund said Europe’s failure to flesh out promises for a banking union – needed to break the “vicious circle” between banks and states – risked a violent credit crunch, slashing an extra 4pc off output in southern Europe next year. (…)

Call me  Mr Rajoy and French president Francois Hollande seized on the warning , demanding the AAA core stands behind its pledge to let the ESM recapitalise Spain’s banks directly. “We have to show we’re serious people and that we do what we say we are going to do,” said Mr Rajoy . Germany, Austria, Finland, and Holland reneged on the accord two weeks ago .

The Franco-Spanish tete-a-tete comes two days before leaders of a newly-dubbed “Mediterranean Front” gather in Malta to thrash out a Latin strategy and plot ways to break the German lockhold on policy. Portugal’s prime minister, Pedro Passos Coelho, will join France, Spain, and Italy for the first time, suggesting that the free-market advocate may have lost its enthusiasm for the German austerity view. Diplomats say the meeting marks a break with EU tradition. For decades, France and Germany pre-cooked agendas before EU summits. (…)

Vitor Constancio, the ECB’s vice-president, said the EU must be careful not to push austerity beyond the therapeutic dose. “The whole balance has to be continuously under observation,” he said, marking a shift in ECB thinking.

Lagarde calls for brake on austerity
IMF increasingly concerned over impact on growth


Fingers crossed  French, Italian Output Jumps

In France, the second-largest of the 17 economies that use the euro, industrial output rose 1.5% in August from July, national statistics bureau Insee said Wednesday. The rise, which was stronger than forecast by analysts, was driven by production of manufactured goods, particularly cars. (…)

Industrial production in the third-largest euro-zone economy surpassed expectations with an increase of 1.7% in August from July, Istat said. An official from the agency said variations in the number of factories that shut down temporarily for the summer break may have distorted the figures. (…)

Industrial output in Germany, the euro zone’s biggest economy, fell 0.5% in August—much worse than the figures for France and Italy, but still an improvement on a 1.2% drop the previous month, official data showed this week. In the U.K., which isn’t part of the euro zone, industrial production also fell 0.5% in August.

Let’s read again Markit’s September PMI:

Eurozone manufacturing production declined for the seventh month running in September. Although the rate of contraction eased to a five-month low, this mainly reflected companies making substantial
inroads into backlogs of pipeline work. In contrast, the trend in new orders remained lacklustre, with inflows of new work declining for the sixteenth straight month. Output and new orders declined across the big-four nations, Austria and Greece. Eurozone manufacturers reported weaker demand from domestic markets and reductions in both intra-Eurozone and global trade flows. New export orders fell for the fifteenth month in a row.

Storm cloud  Slowdown worsens in emerging markets

According to HSBC, in the three months to September, manufacturing output fell on weak demand from developed economies and new orders declined in 11 out of 18 economies surveyed.

During the same period, the service sector in emerging markets dropped to its weakest level since 2005, marking a sharp contrast with the previous quarter when service providers were at their most optimistic for two years.

The bank’s emerging market index, which measures production and business activity in the manufacturing and service sectors, fell to 52.1 during the July-to-September period, down from the 53.2 in the second quarter.

Burberry Sales Growth Slows

Burberry’s comparable sales growth—measured from stores open more than a year—slowed to 1% in the second quarter, compared with 6% in the first and 16% in the second quarter last year. (…)

Pointing up  In Hong Kong this week, luxury retailers hoping for a sales boost during Golden Week, a national holiday period that coincides with the anniversary of China’s founding, were disappointed as sales of watches and jewelry dropped compared with last year.

Storm cloud  BOJ Minutes, Weak Data Raise Easing Prospects

Japanese core machinery orders decreased 3.3% on the month in August, worse than forecast, according to data released Thursday.

[image]The weakness in orders was most visible in the manufacturing industry, which dropped 15.1% on month, the biggest drop since November 2009. (…)

The nationwide core Consumer Price Index fell for the fourth straight month in August, suggesting there is no end in sight to the BOJ’s continuing battle with deflation, while industrial production fell for the third consecutive month and firms expect it to fall again in September and be flat in October.

Bank of Korea Slashes Policy Rate

South Korea’s central bank cut interest rates for a second time this year while China kept its banking system flooded with cash, the latest efforts by Asian authorities to shore up growth as the economic outlook for their big trading partners grows darker. (…)

The monetary loosening by Korea and China followed a decision by Brazil’s central bank to cut its key rate a quarter point to a record low of 7.25% and highlighted moves by emerging-market countries to buttress their economies against headwinds from Western markets. (…)

The BOK cut its growth and inflation forecasts for this year and next, saying it expects the global recovery to be only moderate in the near future, weighed by the prolonged euro-zone crisis. It now expects Korea’s economy to grow 2.4% this year, far below its July projection of 3.0%, and it cut its 2013 forecast to 3.2% from 3.8%. GDP grew 3.6% in 2011.

Korea’s headline inflation likely will ease to 2.3% this year before accelerating to 2.7% in 2013, the BOK said, lowering its projections from its July forecasts of 2.7% and 2.9%, respectively. Inflation last year was 4%.

Brazil Signals Interest Rates to Stay at Record for Long Period


Indonesia Holds Benchmark Rate to Shield Weakening Currency

Surprised smile Indonesian exports fell 24.3 percent in August from a year earlier, after a revised 7.6 percent decline the previous month, the worst contraction since at least June 2009, according to data compiled by Bloomberg. Imports slid 8 percent for a trade balance of $249 million, the first surplus since March.


Rainbow  Land sales fuel predictions of real estate rebound

Land sales in China’s 10 major cities more than doubled in the third quarter compared with the previous one, with the price premium picking up, fueling expectations of a speedier rebound in the country’s real estate sector.

Statistics from real estate service provider Homelink showed that local governments in the 10 cities, including Beijing, Shanghai and Guangzhou, received 135.2 billion yuan ($20.8 billion) from selling land parcels in the third quarter, up 123.8 percent on the second quarter. Floor space sold during the same period jumped 70.1 percent. (…)

The warming up of the land market is due to local governments’ eagerness to launch more quality land parcels onto the market, as well as falling inventories and property developers’ improved cash flow, said Qin Xiaomei, chief researcher at Jones Lang LaSalle Beijing. (…)

Pointing up  Inventory levels appear to be falling in many big cities, countering expectations that it would take years for the market to absorb the large number of empty apartments, Standard Chartered said in a research note on Wednesday.

OPEC Gloomy About Economic Growth

The Organization of the Petroleum Exporting Countries warned that growth in oil demand is shrinking this year and predicted a continued slowdown in 2013.

(…) Given the increasingly weak economic picture, OPEC forecast that oil supply would remain comfortable in the coming year, with production increases from countries outside the group outpacing demand growth.

The market “will be characterized by high volumes of crude supply and increasing production capacity” in the coming year, the report said.

OPEC production fell nearly 265,000 barrels a day in September from August because of production declines in Angola and Nigeria, the report said. Production remained above 31 million barrels a day, according to data from secondary sources collated by the organization’s analysts. OPEC said demand for its oil is expected to average 30.1 million barrels a day this year.

While OPEC’s production exceeds current demand for the group’s output, Saudi Arabia’s oil minister said Tuesday that the country would continue to pump about 10 million barrels a day of oil this month and would like to see oil prices fall to about $100 a barrel. (…)

At the beginning of this month, Iraq’s oil minister said the country would like to see prices between $100 and $120 a barrel. In mid-September, Iran’s OPEC governor said oil prices weren’t too high, even as Brent crude futures rose to their highest level since May, to more than $117 a barrel.




(…) But even before the reporting period “officially” began, the outlook for corporate profits was looking grim, based on the 5% of companies in the S&P 500 that announced their results. Earnings preseason results have historically been predictive of earnings results for the remainder of an earnings season. When an above-average percentage of companies beats earnings estimates during the preseason, the rate at which the rest of the companies beat their own estimates tends to be higher, too, with some two-thirds of those companies announcing higher-than-expected profits. But the opposite also holds true.


Of the 26 S&P 500 companies that have reported their third-quarter earnings results in the preseason, only 14 have reported profits that were higher than analysts’ estimates. This “beat” rate of 54% is significantly below the long-term average of 63%. That suggests that we may see fewer positive surprises than normal as the rest of the quarter’s results come flooding in over the next few weeks. That doesn’t augur well for corporate earnings, given that analysts already had such low expectations.

Companies have had similar results when it comes to hitting or exceeding analysts’ estimates for their revenues. In the preseason, 54% of S&P 500 companies have announced top-line figures that exceeded analyst expectations, while 46% companies fell short. This is an improvement on the revenue results from last quarter, when only 41% of companies beat estimates – a post-financial crisis low. Still, while it may be better than the second-quarter result, the rate at which companies are posting positive surprises on revenues still falls short of the long-term average of 62%.


NEW$ & VIEW$ (13 SEPTEMBER 2012)

OECD Data Points to Slowdown

Most major economies other than Brazil and the U.K. will continue slowing, according to the Organization for Economic Cooperation and Development’s leading indicators.

In Italy, China, India and Russia the CLIs continue to point to a slowdown. For the Euro Area, France, and Germany the CLIs point to continued weak growth.

The CLIs for Japan and the United States show signs of moderating growth above trend, while in Canada the CLI continues to point to growth moderating below trend. The CLIs for the United Kingdom and Brazil tentatively point to a pick-up in growth, but remain below trend.

The OECD Development Centre’s Asian Business Cycle Indicators (ABCIs) suggest that ASEAN economies show overall resilience, though some signs of weakening are observed.




Italy Says It Won’t Seek Aid

image“We don’t think it’s necessary, or desirable, to seek a program” of bond-market intervention, Italy’s Economy Minister Vittorio Grilli said in an interview. (…)

He said Italy is on the verge of a balanced budget, and that so far—despite market concerns over its admittedly large debt—it has had no problem financing it.

Thumbs up  Dutch Vote to Usher in Pro-Europe Coalition

Dutch voters gave a ringing endorsement to centrist parties, as results suggested the likely formation of a broadly pro-European coalition government.


Without knowing the force of words, it is impossible to know more.  (Confucius)

Light bulb Demetriades Says ECB Might Not Need to Spend a Cent in Bond-Purchase Plan European Central Bank Governing Council member Panicos Demetriades said the bank might not have to spend a cent on government bonds.

The threat of unlimited buying under the ECB’s new bond- purchase program may mean that “in the end, action is not needed,” Demetriades, who heads the Central Bank of Cyprus, said in an interview in Nicosia yesterday. “No one will speculate against the unlimited firepower of a central bank. This is what stabilizes currencies of countries where investors know that. One wouldn’t gamble against the Federal Reserve, for example.”

Italy Sells 3-Year Debt at Lowest Yield in Almost 2 Years

ECB Will Again Be the Lender of Last ResortThe Rome-based Treasury sold 4 billion euros ($5.2 billion) of its benchmark three-year bond to yield 2.75 percent, down from 4.65 percent at the last auction of the same securities on July 13.

Italy also sold 1 billion euros of five-year debt today at 3.71 percent and 1.5 billion euros of bonds due in 2026 at 5.32 percent, the longest-maturity bonds sold this year.

Indonesia Holds Key Rate as Asian Monetary Easing Subsides

Bank of Korea Unexpectedly Holds Rates After Stimulus

New Zealand Keeps Record-Low Rate as Bollard Term Nears End

Russia to Refrain From Rate Increase on Growth Concerns

Switzerland to Keep Euro-Franc Floor

The Swiss National Bank reiterated its pledge to step in if the currency gets stronger than 1.20 francs to the euro, and said it is ready to take further measures at any time. But some exporters and traders had hoped the SNB would assist them by seizing on the euro’s recent gains as an opportunity to raise the intervention floor.


Surprised smile  Govt revenue down in Aug for first time in 2012  August saw the central government collect less monthly income year-on-year for the first time in 2012 as the country’s economy continued to weaken.

imageThe central government collected 376.5 billion yuan ($59.5 billion) in fiscal revenue last month, 6.7 percent less than in the same month a year ago, the Ministry of Finance said in a statement on Tuesday.

Despite the decline in the central government’s collections, governments at all levels brought 4.2 percent more fiscal revenue year-on-year in August, 786.3 billion yuan in total.

Pointing up Bears at the heart of the dragon
Local pessimism on China’s economy contrasts with western hope

In contrast to the optimism of many international attendees in Tianjin this is what one highly respected Chinese economist told the FT:

“I believe China is going to experience a very serious economic downturn and I think it has already started. The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest.”

The striking views of this economist, who asked not to be named because he did not want to offend his superiors in the Communist party, are surprisingly common among Chinese academics and officials who just a couple of years ago were still very bullish on the country’s prospects. (…)

That means global investors looking to China to save the world economy will almost certainly be disappointed and should probably reassess their assumptions about what is going on in the Chinese economy.

After a series of private meetings with Chinese officials and analysts at the WEF this week one senior executive from a very large western fund manager told the FT that he was doing just that:

“After what I’ve heard I’m really worried now about being the dumb foreigner sitting across the negotiating table from the locals who are packed and ready to run to the airport.”

Right on cue:


Big Stimulus Would Harm China Long-Term Growth: Xinhua

Massive stimulus measures would hurt China’s long-term growth and the government’s hesitation in making “bold moves” to support the economy is pragmatic, the official Xinhua News Agency wrote in a commentary.

“Many have expected the government to announce an aggressive plan, similar to the 4-trillion-yuan ($632 billion) stimulus package issued in 2008, to keep the economy from stalling for a second time,” Xinhua writer Liu Jie wrote in the commentary published yesterday. “However, a massive stimulus plan is not only unlikely, but would be detrimental to the country’s sustainable growth.” (…)

In its commentary, Xinhua said this time round, China is focusing on invigorating the private sector, improving social security and widening the yuan’s trading band rather than showering money onto investment projects. Policy makers are aware of the limitations of a possible stimulus plan and don’t want to disrupt the re-balancing of the economy, it said.


Sad smile  [image]Household Income Falls to ’95 Level  The typical American household saw its income fall for the fourth consecutive year in 2011 and the poverty rate was essentially flat from a year earlier, according to the Census bureau.

The official U.S. poverty rate—defined as an annual income of $23,021 for a family of four—was 15.0% in 2011, down from 15.1% in 2010. That compares with 12.5% in 2007 before the recession started in full force.



Good charts from RBC Capital Markets:



Just as earnings are being revised downward on a weakening economy:


Work  US groups step up sales of non-core units  Divestitures account for record 57% of US deals this year

US companies are shedding non-core assets at a record rate, selling underperforming units to competitors and financial sponsors as investors pressure management to streamline amid financial hardship.

Divestitures account for a record 57 per cent of US mergers and acquisitions by deal value so far this year, according to Dealogic. That is up from just 42 per cent last year, and 26 per cent in 2005.


NEW$ & VIEW$ (11 June 2012)

CHINA economic releases last weekend are covered in a separate post.

Smile  China’s Inflation Slowed Significantly in May

The country’s consumer price index rose 3.0% from a year earlier in May. That was down from April’s 3.4% rise.  Food prices, which were the main contributor to inflation last year, continued to moderate. Food prices were up 6.4% from a year earlier in May, compared with April’s 7.0% rise. Nonfood prices rose 1.4% from a year earlier, compared with April’s 1.8% increase.


Meanwhile, the producer price index, which measures wholesale prices paid by businesses, fell by 1.4% from a year earlier in May, compared to a 0.7% decline in April.

Compared with the previous month, it edged down 0.3 percent in May, the NBS said. On a monthly basis, food prices dropped 0.9 percent from April, the NBS said.

China not to ease property controls  China is not likely to loosen the reins on its property sector soon despite expectations for policy easing, according to government advisors and observers.

Help wanted – China struggles to fill jobs  Record shortfall of workers in the first quarter

(…) From Beijing in north China to the southern manufacturing province of Guangdong, the main concern of workers is not finding jobs, but securing higher pay. In fact, companies say they are struggling to find and retain staff.

For the government, this is a significant argument against launching large-scale economic stimulus, as there is no need for a major spending boost to create jobs. (…)

The human resources ministry says that for every 108 employees sought by companies, only 100 people were looking for jobs – equating to a nationwide deficit of nearly 1m workers.

Lightning  IN EUROPE

  • Spain bailout cheers markets  Growing risk appetite pushes Treasury and Bund yields higher
  • Rajoy presents Spain bailout as ‘victory’  Fourth and largest eurozone economy to seek aid
  • Eurozone buys itself some time  States and banks in lethal embrace as key dysfunction unaddressed
  • The €249bn hole  Plenty of estimates on the depth of the resultant black hole are doing the rounds. The external auditors brought in to report on this, Oliver Wyman and Roland Berger, were supposed to produce their own numbers by the end of June, although there are now suggestions they will not do so until the end of July. What’s that old rule about bad numbers taking longer to add up than good ones…?

  • Italy Moves Into Debt-Crisis Crosshairs After Spain Bailout Rally Fizzles The 100 billion-euro ($126 billion) rescue for Spain’s banks moved Italy to the frontline of Europe’s debt crisis as an initial rally in the country’s bonds fizzled on concern it may be the next to succumb.

Pointing up  Hollande set to win Assembly majority

New French president leads after first round of voting

If confirmed in the decisive second round next Sunday, Mr Hollande will have a free hand to implement his plans to boost growth – and to reveal his as-yet unspecified plan to meet tough commitments on reducing France’s budget deficit.

Socialist party leaders welcomed the marked swing to the left in the first round vote, but expressed caution about the final outcome given a historically low turnout of 57 per cent.

Mr Hollande’s Socialist party and its closest allies won more than 35 per cent of the first-round vote, a shade ahead of the centre-right led by the UMP of Mr Sarkozy, who was defeated by Mr Hollande last month.

Projections of the final outcome based on Sunday’s vote suggested the Socialist-led group could win an outright majority in the 577-seat assembly next Sunday, the best outcome for Mr Hollande. But it was almost assured of doing so in league with the Greens, who have an electoral pact with the Socialists.

Italian Leader Sees Support Slide

[MONTI]Support for Italian Prime Minister Mario Monti and his parliamentary majority are slipping, a new poll showed Friday, highlighting growing public disappointment at collapsing growth in the euro zone’s third-largest economy and indecision in Europe about how to tackle the financial crisis. (…)

Mr. Monti on Thursday acknowledged he no longer had the support of the nation’s largest newspapers, which are owned by the nation’s main business lobby and its powerful corporate interests. That comment came after the economic spokesman of the center-left Democratic Party a few days ago claimed that the government had lost momentum and that the country should vote in national elections this autumn.

Pierluigi Bersani, the Democratic Party’s leader, on Friday struck a more conciliatory note, saying he hoped Mr. Monti’s government would last until the legislature ends in the spring of 2013.

 Obama Urges Europe to Act Decisively  Confused smile


Ghost  Is it 1932 again?
Niall Ferguson and Nouriel Roubini

Berlin is ignoring the lessons of the 1930s

(…) Until recently, the German position has been relentlessly negative on all such proposals. We understand German concerns about moral hazard. Putting German taxpayers’ money on the line will be hard to justify if meaningful reforms do not materialise on the periphery. But such reforms are bound to take time. Structural reform of the German labour market was hardly an overnight success. By contrast, the European banking crisis is a real hazard that could escalate in days.

Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of a eurozone break-up would be astronomically high – for themselves as much as anyone.

After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the eurozone remains the destination for 42 per cent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.

Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union. But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.


imageThe European economic downturn deepened across a broad base of industries and sectors in May, PMI® data for the EU signalled. Of 7 broad industry groups covered, all are showing sharper declines in output in Q2 so far than in the final quarter of 2011. Moreover, further deterioration is likely in June as new orders fell markedly in many sectors.

Auto  imageOutput in the EU autos sector fell more sharply than in any other sector in May. The rate of decline was the strongest since April 2009, and production has now fallen seven times in the past eight months. Comparing with official data from the EU statistical office Eurostat – and advancing the PMI Output Index by three months in order to get the best relationship – suggests that official year-on-year autos output will drop sharply in the coming months, approaching a double-digit pace by August. (Markit)


Taxable Property Values Point Higher in Some South Florida Counties

Three of the largest counties in the state, Miami-Dade (Aa2 negative),Broward (Aaa stable), and Palm Beach (Aaa stable), reported their first annual increase in taxable property values since 2007. Taxable values in Miami-Dade County increased by 1.5%, Broward increased by 1.2%, and Palm Beach by 0.1%.





The CLIs for Japan, the United States and Russia continue to signal improvements in economic activity. However, the deceleration in these countries’ CLIs over the last four months provides tentative signs that growth may moderate in the near term.

In France and Italy the CLIs continue to point to sluggish economic activity. The CLIs for Germany, Canada, the United Kingdom and the Euro Area as a whole continue to point towards economic activity slightly below long-term trend.

The assessment for China and India has changed significantly since last month. For both countries, the CLIs point towards economic activity below long-term trend.

In Brazil the CLI continues to point towards a turning point with economic activity returning towards long-term trend but with a weaker intensity.



Big Banks Brace for Downgrades  Banks, bond issuers and investors are bracing for aftershocks from a wave of bank downgrades expected to hit the U.S. as soon as the coming week.

Moody’s Investors Service has said it is likely to reduce by the end of June credit ratings for 17 large global banks, including five of the six biggest U.S. financial firms by assets. (…)

Some banks have estimated some of the direct costs of a Moody’s downgrade, such as additional collateral they would have to post or termination payments they would make.

In its first-quarter financial report, Morgan Stanley said it could pay as much as $9.6 billion for a three-notch downgrade by multiple rating agencies. Goldman Sachs said its costs could hit $2.2 billion for a two-notch reduction, and Bank of America said a one-notch downgrade could deliver a $2.7 billion hit.

The biggest impact could be to deprive some institutions of trading revenue. A three-notch downgrade of Morgan Stanley could slash demand for derivatives, a crucial business on Wall Street, by around 30%, estimates Alliance Bernstein analyst Brad Hintz.

Citi Won’t Request Stock Buyback

In a sign of the shock waves due to weakening global growth and large trading losses at a rival, Citigroup said it won’t seek regulatory permission to repurchase shares this year.

The decision marks an about-face for the New York company, whose executives were taken by surprise in March, when the Federal Reserve rejected a request to buy back as much as $8 billion of stock over three years.

That March setback came as part of the latest round of Fed-supervised “stress tests,” which were designed to determine the capacity of financial firms to keep lending in a severe economic downturn. The bank was required to resubmit its proposal to the Fed by June 11, and analysts had widely expected the company to ask for a small buyback, especially since Citigroup has more capital today than when regulators conducted their earlier review.


Currency Hit May Lurk at U.S. Fims

[AOT]Foreign-currency translation for U.S. multinationals will be a bigger issue than usual in the coming second-quarter earnings season.

The U.S. dollar index is 11% higher than a year earlier and has risen as much as 5.7% this quarter.

Standard & Poor’s estimates that 46% of revenue for S&P 500 constituents came from abroad in 2010, the last period for which detailed data are available, with the technology and materials sectors getting more than half of their sales overseas.

International Revenue Exposure

Although the S&P 500 is considered to be a gauge of large cap US equities, many investors would be surprised to learn that some of the companies in the index are hardly American at all.  For example, when it comes to iconic American brands, names that come to mind are McDonald’s (MCD), Coca Cola (KO), and Heinz (HNZ).  Would you believe, though, that each one of these companies generates more than half of their sales outside of the United States? 

Since different companies have more exposure to international sources than others, fluctuations in the value of the US dollar can have a significant impact on stock performance.  Companies that generate most of their revenues outside the United States are adversely impacted when the US Dollar appreciates, while companies with more domestic exposure benefit.  In this chart, we created two baskets of S&P 500 stocks.  The first basket contained stocks that generate 100% of their revenues in the United States while the second basket contained S&P 500 stocks that generate more than half of their sales outside the United States.

As shown in the chart, since the start of the second quarter when the problems in Europe bubbled up and the Euro cratered, companies in our Internationals basket have dropped significantly more than the basket of Domestics.  At current levels, the spread between the two baskets is now at its highest levels of the year!

Factset quantifies the drag from Europe:

Of the top 25 companies in the S&P 500 by market capitalization, ten provided a geographic breakdown of sales for Q1 2012 including Europe. On average, these ten companies generated 22.6% of sales from Europe. Oracle and IBM are at the high end of the list, with nearly 31% of sales coming from Europe in Q1 2012. Coca-Cola is at the bottom of the list, with just under 11% of sales coming from Europe in Q1 2012. The other top 15 companies by market capitalization did not provide sales numbers for Europe for the quarter.

Looking at the estimated sales growth rates for Q2 2012, it is interesting to note that seven of these ten companies are expected to see lower revenue growth for the quarter than the S&P 500 as a whole (2.0%). Apple (32.3%), Intel (4.5%), and Coca-Cola (2.1%) are the only three companies within this group projected to see higher revenue growth in Q2 2012 relative to the entire S&P 500.



Winking smile  Looking for tax losses?

Uncollateralized Trillion Euro Perpetual Zero Coupon