NEW$ & VIEW$ (21 MAY 2013)

Chicago Fed: Economic Activity Was Slower in April

According to the Chicago Fed’s National Activity Index, April economic activity slowed from March, now at -0.53, down from March’s -0.23. This index has been negative (meaning below-trend growth) for eleven of the past fourteen months. (Doug Short)

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The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

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Fingers crossed  Developed Economies See Slight Growth

Developed economies returned to growth in the first three months of the year, although the euro zone continued to lag behind the U.S. and Japan, according to figures released by the Organization for Economic Cooperation and Development.

In the United States, the CLI continues to point to economic growth firming. In Japan, it indicates that growth should remain above trend.
In the Euro Area as a whole, the CLIs continue to indicate a gain in momentum. In Germany, the CLI shows that growth is returning to trend. In France, the CLI points to growth close to trend rate. As in April, the CLI points to a positive change in momentum in Italy.

The CLIs for the United Kingdom, Canada, Brazil and Russia point to growth close to trend rates. In China, the CLI indicates that growth is returning to trend while for India, it continues to indicate growth below trend.



Thumbs up  German Central Bank Sounds Upbeat Note

The German economy is due to recover at a stronger clip in the current quarter than in the first three months of the year, but the euro-zone debt crisis remains a significant risk, Germany’s central bank wrote Tuesday.

Both an expected recovery in construction after weather delays in the winter and encouraging signs from the industrial sector support the outlook, the Bundesbank said. (…)

The bank said that not only would a “catch-up effect” in the construction sector following a rough winter contribute to growth, but the “noticeable increase in industrial new orders after the weak beginning of the year generates hope that exports and equipment investment,” two traditional growth drivers of the German economy, will increase. (…)

High five  Markit’s latest PMIs were not that upbeat: 

Germany’s manufacturing sector started the second  quarter of 2013 with declines in output, new orders  and employment. As a result, the final seasonally  adjusted Markit/BME Germany Purchasing  Managers’ Index® posted below the  neutral 50.0 mark in April. At 48.1, down from 49.0  in March, the latest reading indicated a moderate  worsening of overall business conditions, and the  rate of deterioration was the most marked since  December 2012.

The final seasonally adjusted Markit Germany Composite Output Index – which measures the  combined output of the manufacturing and service
sectors – dropped to 49.2 in April, from 50.6 in  March. This was below the 50.0 no-change value for  the first time in five months and signalled a marginal  reduction of overall private sector output in  Germany.

Storm cloud  Chile’s Economy Slows Sharply, As Hit From Copper Price Fall Dazes  The decline of copper prices this year has started to undermine the economy of Chile, the world’s leading source of the red metal.

The Andean nation Monday reported annual gross domestic product growth of 4.1% in the first quarter, less than the 4.5% expected.  Even adjusted for the Easter holiday, which fell in March this year and April last year, growth was still 4.7%, pretty good relative to most other parts of the world. But it was a full percentage point below Chile’s 5.7% expansion in the last quarter of 2012.

Moreover, its seasonally adjusted quarterly growth was just 0.5%, making for an annualized rise of about 2%.

No one expects Chile’s economy to downshift to that extent this year after growing 5.6% in 2012. But it’s now highly likely to grow closer to the bottom end of the central bank’s 4.5% to 5.5% forecast range.


Highly unusual divergence.


U.K. Inflation Rate Falls More Than Forecast to 2.4%  U.K. inflation slowed more than economists forecast in April to a seven-month low and producer prices rose the least since 2009 as fuel costs fell.


S&P’s just updated earnings tally to May 17:

  • Of the 465 (93%) companies having reported, 66% beat and 26% missed. The miss rate rose to 58% last week, up from 48%, 28% and 21% in each of the previous weeks respectively.
  • Q1 EPS are now estimated at $25.74, down 0.8% from last week but up 1% from the estimate on March 28. Q2’13 estimate is $26.69, up $0.06 from last week but down 3% from March 28. The full 2013 estimate, at $109.69 is down $0.20 from last week and 1.3% from March 28.
  • Trailing 12-month EPS should total $98.32, down $0.22 from last week and up only 1.5% QoQ and +0.2% YoY.

Earnings preannouncements for Q2 as of May 16 (from Factset):



Here is an interesting statistic to think about for a moment.

The current rise in the stock market has gone uninterrupted for 181
days which is the longest period in the history of the stock market.
Think about that for a moment.

Over the last 113 years of stock market history we are now witnessing the longest rise – ever. Every single time in history, when the markets have gone on extended runs, they have NEVER, not once, lasted as long as the current artificially fueled advance. What do you think is likely to happen next? (Lance Roberts)


NEW$ & VIEW$ (20 MAY 2013)


Leading Indicators Index in U.S. Rises More Than Forecast

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today.

Seven of the 10 indicators in the leading index contributed to the increase, including a jump in building permits, a drop in the number of jobless claims and the widening interest-rate spread between the federal funds rate and 10-year Treasury notes.

The LEI, to me the best economic indicator, refuses to signal a major economic contraction for the U.S. Here are Doug Short’s excellent charts:

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Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

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Falling commodity prices and a rising dollar show the broad picture: the global outlook is weakening a little and becoming more dependent on the US.

  • Auto  Friday’s report of better car sales in Europe might have cheered investors. But…

Sadly, anyone hoping to conclude that Europe’s deeply depressed automobile market has finally revved up, also needs to consider the bad news. There were, on average, two extra working days in April this year compared with 2012. In itself, this would account for the increase, Sputteringaccording to the automakers’ trade association. Also, in absolute terms, only 1.04m new car registrations occurred last month, the third lowest level for any April on record. That leaves EU car registrations for the first four months down 7 per cent. So not exactly a sign of new spark plugs, more one of an engine struggling to splutter into life.

Even so, the data does complement anecdotal evidence that a sector trough has been reached. This can be put down to stabilising economic conditions which, in turn, may be encouraging some owners to replace older clunkers. Deutsche Bank puts the region’s usual replacement demand at about 14m units annually. Sales have been below that since 2008 and barely topped 12m units in 2012. Also reinforcing the sense of a trough is the fact that April’s uptick was well-spread. Germany, Spain and the UK all saw year-on-year growth last month. Even in France, falls were much diminished. Of Europe’s five big markets, only Italy stayed stubbornly stalled. (…)

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement program.

Mr. Letta, however, emphasized that only the summer installment of the tax on primary residences is being suspended. That is because the government intends this summer to overhaul the way Italy’s tax code impacts real estate overall. Rome draws €44 billion in revenue from taxes, tariffs and other levies related to private property. About half of that is linked to ownership and the rest to service charges. (…)

The decision to lower a tax on property is popular, because of Italy’s high home-ownership rates. But it also reduces the government’s room to maneuver on another important issue: lowering income and business taxes.

Italian income taxes are unusually high even by European standards and hobble competitiveness and output, said Timo del Carpio, an economist at RBC Capital Markets in London.

The property tax was an efficient tool to spread out Italy’s painful fiscal adjustment amid the euro-zone debt crisis, said Mr. Carpio.

The decision to undo it shows that Mr. Letta’s “fragile coalition is already proving to be an obstacle” toward that goal, he said. (…)

  • Mexico’s First Quarter GDP Down, But Far From Out  Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected.

ChartMexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009.

In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%.

Friday’s data disappointed, prompting Mexico’s government to cut its 2013 growth forecast to 3.1%, down from 3.5% previously.

But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after PresidentEnrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements. (Chart from FT)

Russia’s economy grew at 1.6 per cent in the first quarter compared with a year earlier, its slowest growth rate since 2009, on the back of a fall in investment and lower commodity prices.

Friday’s data, from Russia’s State Statistics Service, is significantly better than the 1.1 per cent growth figure estimated earlier this year by the Russian economy ministry and beat market expectations. However, Russia is still looking at significantly reduced economic growth for 2013, with most economists slashing full-year forecasts.

The economy ministry estimates growth will reach just 2.4 per cent for 2013, while last week the European Bank for Reconstruction and Development halved its own forecast to 1.8 per cent. Economists polled by Reuters gave a more optimistic consensus forecast of 2.9 per cent.

China’s housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.

Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.

The rise was the sharpest since April 2011. (…)

New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai’s prices were up 8.5 percent in April from a year ago. Both marked the fastest year-on-year gains since January 2011 when NBS changed the way it calculated data.

However, on a monthly basis, new home prices rose 1 percent in April, easing from March’s gain of 1.2 percent, the NBS data showed, providing tentative signs that recent government moves to ward off property bubbles are biting. Confused smile

Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March. (…)

The economy contracted 2.2 per cent in the January to March period from the previous quarter – largely due to sluggish domestic demand and exports – although it grew 5.3 per cent on an annualised basis.

At the same time the National Economic and Social Development Board trimmed its forecast for full-year economic expansion to 4.2-5.2 per cent from the 4.5-5.5 per cent range. It also cut its projection of 2013 export growth to 7.6 per cent from 11.0 per cent. (…)

This year Thai authorities and industry have been concerned about the strength of the baht, emerging Asia’s strongest currency in 2013. (…)

Vietnam still faces “great risk” of macroeconomic instability, a deputy premier said, as credit growth trails behind targets while banks work to reduce elevated bad debt that has hampered growth.

The Philippines, which won its first investment-grade ranking from Fitch Ratings and Standard & Poor’s this year, is seeking to slow surging capital inflows that boosted the peso and sent stocks to a record-high this month. Bangko Sentral cut the rate on SDAs three times this year to 2 percent, after banning foreign funds from the facility in 2012.



Japan Upgrades Economic Outlook

The Japanese government upgraded its assessment of the domestic economy for the first time in two months in its May report, as a pickup in exports fueled by the weak yen helped improve confidence in Japan’s still-nascent economic recovery.

Winking smile  (Looks like devaluation is more effective than austerity)




Earnings Are a Margin Story but for How Long

(…) Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices. The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.

Margins are higher now than at any point in the recovery, when some observers were already pointing to the higher margins as an unsustainable trend. Eventually, they argued, the margins would have to revert to the mean and put pressure on earnings, in the absence of strong sales growth.

It hasn’t happened yet, which is at least one reason why valuations still look reasonable. (…)


March 2013 CCRSI National Results Highlights

  • PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period. 
  • SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. Despite the recent decline, the two components of the Equal-Weighted Index—the Investment Grade Index and General Commercial Index—remained 11.0% and 4.9% above year-ago levels, respectively. 
  • TRANSACTION VOLUME ACCELERATES IN MARCH: Composite pair volume of $5.5 billion in March 2013 marked an increase from a $3.3 billion monthly average during January and February 2013.  Yet the first quarter’s total of $12.1 billion was well below the record-setting volume reached in the final quarter of 2012, as expected. Transaction volume for the first quarter of 2013 was in line with the first quarter of 2012’s total and well above the first quarter totals of 2011 and 2010.  Transaction volume appears to be responding to acceleration in lending volume across debt capital sources including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity. 
  • DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.



U.S. Approves More Gas Exports

The Obama administration cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.

The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillips plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations.

The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. (…)

Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise. (…)

The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

US energy revolution gathers pace
Obama approves wider LNG exports as door opens to Japan and EU



NEW$ & VIEW$ (19 APRIL 2013)

Still travelling…almost there…

Conference Board Leading Economic Index: ’Declined Slightly in March’

The Conference Board Leading Economic Index (LEI) for March was released this morning. The index declined 0.1 percent to 94.7 (2004 = 100), following a 0.5 increase in each of the two previous months.

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Philly Fed Business Outlook: Essentially Flat Growth

Today’s gauge of General Activity remains positive at 1.3 but is fractionally lower than last month’s 2.0. However, the 3-month moving average came in at -3.1, the tenth negative reading in eleven months. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion.

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The demand for manufactured goods remained weak, with the current new orders index declining from 0.5 to -1.0. The shipments index showed continued improvement, however: The index remained positive and edged six points higher, to 9.1, its highest reading in four months. Nearly 28 percent of the firms reported an increase in shipments; 19 percent reported a decrease. Firms reported a notable decrease in inventories this month: The current inventories index fell from zero to -22.2.

Jobless Claims Rise by 4,000

Initial jobless claims, an indication of layoffs, increased by 4,000 to a seasonally adjusted 352,000 in the week ended April 13, the Labor Department said Thursday.

A broader measure of claims continued to climb. The four-week moving average of claims, which smooths out week-to-week volatility, grew by 2,750 to 361,250, the highest level since mid-February.

Meanwhile, claims for the week ending April 6 were revised up to 348,000 from an initially reported 346,000.

Yen falls after G20 backs Abenomics
Finance minister says group not resistant to Japanese policies


Credit Crunch Widens Europe Business Rifts

The ECB has flooded the euro zone with cheap loans over the past three years, but large swaths of small and midsize businesses have received precious little of this liquidity.

(…) The root of the problem is that most European companies depend disproportionately on bank lending for their funding—more than 70% of funding comes from loans. This reliance means that the continuing credit crunch might squelch any chance that the euro-zone economy will recover later this year after contracting for five straight quarters. (…)

Total corporate loans fell 2.7% in the euro zone in February compared with a year earlier, the biggest drop in two years, according to Morgan Stanley. They sank 8% in Spain and 4% in Ireland, also in February. (…)

The percentage of Italian companies citing access to financing as their most significant problem is the highest since 2009, according to ECB surveys. (…)

And the ECB’s latest survey in January showed banks are tightening lending standards further. Indeed, as banks have slashed branches and centralized the loan-application process, it has become more difficult for small-business people to rely on long-standing relationships with local bank managers to secure a loan, as was the practice in Southern Europe.

“Given the rise in bad loans, it’s obvious that lending policies have to change,” said Giovanni Sabatini, head of the Italian Banking Association.

The pain is even being felt in parts of the North. At CeFip, a Belgian agency that helps businesses appeal rejected loan applications, requests for help have doubled since November. French companies, which enjoy some of the lowest rates in Europe, are complaining too; according to a survey by France’s association of smaller businesses, 59% failed to get funding for at least one project last year. (…)

France Hits Brakes on Austerity

The French government presented its plan to avoid austerity and let its debt keep rising an extra year as the economy struggles to grow.

In Germany, Chancellor Angela Merkel, who faces general elections in the fall, says euro-zone countries must live within their means and reduce their budget deficits to restore sound public finances.

The chancellor, who let Germany’s budget discipline slip in 2009 during the global financial crisis, has also rejected calls from France and the U.S. to help finance growth-boosting measures.

“We don’t have the muscle to put in place for the second time a large stimulus program without losing international confidence,” Ms. Merkel said on Monday. (…)

The French president said last month he wouldn’t accept European countries being put “in a house of correction,” when they try to protect themselves from plunging into recession.

In Germany, Ms. Merkel said Wednesday that she would closely watch France’s efforts to improve its economy, without being overbearing.

“We will follow these reforms, which France will introduce or which are already in progress, in a very friendly manner,” she said.

Dutch unemployment jumps in March

Jobless rate rises to 6.4 per cent from 6.2 per cent

The unexpectedly large bump in the rate to 6.4 per cent from 6.2 per cent a month earlier comes as the Dutch government encounters increasing political resistance to the austerity policies it has pursued for the past two years, with further cuts needed to meet European budget deficit targets. (…)

The Netherlands’ Central Bureau for Statistics said the increase in unemployment had been sharpest among 25 to 45-year-olds. Job losses have been concentrated in domestic industries, including the building trade, which has been hit hard by a falling housing market.

Unemployment claims also rose, particularly in retail and the healthcare sector, which has faced sharp government budget cuts.

Brazil’s Central Bank Raises Base Rate

Brazil’s central bank Wednesday raised its base interest rate for the first time in nearly two years, but economists say the modest increase could be only the beginning of a longer tightening cycle to combat inflation.

Toyota to Make Lexuses in U.S.

Toyota will move part of its production of the Lexus ES, currently built at a plant in Kyushu in southern Japan, the person said.

The ES model isn’t sold in Japan, and all of the ones made in Kyushu are shipped to North America, the Middle East and Asia. The person said the shift to the U.S. is aimed at making ES production more cost-effective, as North America is the top destination for the vehicle.

Japanese media reported earlier in the day that Toyota will start producing Lexus-brand cars at its Kentucky plant as early as in 2015.

Nestlé Expects Volatility to Stay

Nestlé said it expects the food market to remain volatile this year, as it reported a worse-than-expected rise in sales on weak consumer confidence in Europe and slowing demand in emerging markets.

Carrefour Hit by Currency Effects  (and weak sales)

In Europe, excluding France, Carrefour reported a 3.5% drop in revenue to €5.46 billion. Sales also dipped in France as the retailer struggled to maintain recent improvements in trends, which had given encouraging signs on the progress of the strategy under new Chief Executive Georges Plassat, who was appointed in spring last year. Domestic first-quarter revenue declined 0.7% on year to €9.29 billion, but the company underlined the resilient performance of its stores under unfavorable weather conditions.

Copper Inventories Rising

(…) It was understandable that copper inventories would rise back in 2008, when the economy was grinding to a halt, and when copper prices plummeted from above $4/pound in July 2008 to $1.25/pound in December 2008.  And shortly after copper bottomed at the end of December 2008, copper inventory levels started coming back down again.

Now we are seeing an even more rapid rise in inventory levels, and it comes on just a small amount of drop in copper prices.  The first message to take from this is that copper producers don’t think that $3.60 is a fair price.

That’s where copper was hovering just as the big run up started in inventory levels.  The inventory rise makes a pretty emphatic statement that the producers think they can get a better price by waiting.

Copper Inventories Copper Inventories Rising

Tom McLellan is too generous with mining companies. They are not as smart as he suggests. Rising inventories are almost always involuntary, a result of unexpected falling demand.

American Dream of Owning Home Lives On, Even for Young

Americans’ dream of owning a home is alive and well, evidenced by the fact that most Americans own a home and plan to continue to do so (56%), or don’t own a home but plan on buying one in the next 10 years (25%). Eleven percent of Americans don’t own a home and have no plans to buy one, and 3% own a home but plan on selling it and renting in the next 10 years.

Current and Projected Homeownership, April 2013


The bond market isn’t the only thing going against stocks these days. Apart from large-cap U.S. stocks, a lot of asset classes are waving red flags (or white flags, as the case may be). Consider this:

– The Russell 2000, one of the best measures of U.S. small-cap stocks, is down about 5% from its mid-March high.

– The STOXX Europe 600, the broadest measure of corporate Europe, is down about 4.5% since its April high; further, apart from Germany and the U.K., European stock markets are having a bad year.

– The iShares MSCI Emerging Markets Index Fund is down about 9.4% this year.

– China’s Shanghai Composite is down about 10% from its February high.

– Crude oil prices (West Texas Intermediate) are down about 12% from their 2013 high.

– Copper prices are down about 16% since their early February high.

– Gold prices are down…well, don’t even both asking about gold right now.

The markets, it seems, are more focused on the IMF’s gloomy assessment of the global economy than the Fed’s relatively upbeat assessment of the U.S. economy. We’ve seen such a burst of central bank intervention this year, and the biggest, the DJIA, the S&P 500, the Nikkei 225, have been so strong, that a lot of this underlying weakness has been papered over. With the Dow and S&P 500 showing their own warning signs, that paper’s wearing thin. It’s almost see-through at this point. (…)

(Bespoke Investment)

As of today (4/17), there are 278 stocks in the S&P 500 (55.6% of the index) that currently yield more than the 10-year US Treasury.  Additionally, more than a quarter of all stocks in the index (132) yield more than the 30-year US Treasury.  

While the large percentage of stocks yielding more than US Treasuries is more a result of historically low interest rates than historically high dividend yields, it is hard to argue that the market is overvalued when earnings multiples are merely inline with historical averages while the ‘coupon’ is greater than the payout on Treasuries.

And how`s that to boost sentiment?
Central bankers say they are flying blind
Monetary policy experts fear side-effects of excessive easing

Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board, captured the mood at the IMF’s spring meeting, saying: “We don’t fully understand what is happening in advanced economies.”


The rise of rail oil

Pipeline or oil? Pick your risk.

Smaller Share of High School Grads Going to College

The college enrollment rate — the share of recent U.S. high-school graduates enrolling in college or a university in the same year — dropped in 2012 to 66.2%, the lowest level since 2006, the Labor Departmentsaid in a report on Wednesday. For 2012 graduates, the rate dropped for both men and women, to 61.3% from 64.6% in 2011, and 71.3% from 72.3%, respectively.

The findings suggest some high-school graduates are becoming more confident about their job prospects after years of hiding out by going to college. When the economy sank into recession between 2007 and 2009, the college enrollment rate rose steadily to a record high of 70.1%. The implosion of America’s construction industry, for example, meant fewer jobs for young men looking for work right out of high school. Now it appears some of these young graduates are going on the job market again.

The unusually high number of high-school graduates going to school instead of looking for work has also kept the nation’s overall unemployment rate artificially low, since going to school takes you out of the labor force. If more freshly-minted grads now look for jobs and enter the work force, that will push unemployment higher.

There were other gloomy signals in the government’s latest report. The share of recent black American high-school graduates enrolling in college dropped precipitously to 58.2% from 67.5% in October 2011 — a much bigger drop than for whites, Asians and Hispanics. Last October—when the Labor Department gathered its data — the unemployment rate for high-school grads who didn’t enroll in school was 34.4%, up from 33.6% a year earlier.

Meanwhile, the unemployment rate for people age 16 to 24 without a high school diploma was 28.8% for men — a big jump from 19.7% a year earlier. The “labor-force participation rate” for all Americans who dropped out of high school last year — those who were working or looking for work — tumbled to 47.2% from 55.5%, a sign that those without even high-school diplomas are struggling to find their way.


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$ (22 MARCH 2013)

U.S. LEI firm. Philly Fed Index somewhat better. Existing home sales solid, inventory down sharply. U.S. oil demand keeps falling. Europe in deep trouble: France sinking, Germany holding (!), Italy, mamma mia! Inflation watch.

Sun  U.S. Leading Economic Indicators Continue To Firm

The index of Leading Economic Indicators, published by the Conference Board, increased 0.5% (2.0% y/y) during February after a revised 0.5% January increase, initially reported as 0.2%. Eighty percent of the component series had a positive influence on the index. A steeper interest rate yield curve, the leading credit index, more building permits and a longer average workweek were the primary drivers of last month’s gain. These were offset by lower consumer expectations for business & economic conditions and fewer real orders for nondefense capital goods excluding aircraft.

Recession risk is low as these two charts fro Doug Short attest:

Click to View

Click to View

Philly Fed Index Shows Manufacturing Expansion

The Philadelphia Fed said its index of general business activity within its regional factory sector increased to 2.0 after it unexpectedly fell to -12.5 in February from -5.8 in January.

The new orders index increased to 0.5 from -7.8, and the shipments index rose to 3.5 from 2.4.

Readings on labor demand, however, were mixed. The important hiring index rose to 2.7 from 0.9 in February, but the workweek index plunged to -12.9 from -1.6.


Existing-Home Sales Hit Highest Point Since 2009  Sales of previously owned properties grew last month to the highest level in more than three years and more people put their properties up for sale, a sign the improving housing market will lift the economy this year.

Existing-home sales increased 0.8% in February from a month earlier to a seasonally adjusted annual rate of 4.98 million, the highest level since November 2009, the National Association of Realtors said Thursday. Sales were 10.2% above the same month a year earlier, the 20th consecutive month of year-over-year gains.

Pointing up Inventory is down 19.2% from February 2012.


(Haver Analytics)

U.S. Oil Demand Declined in February, API Says

Total petroleum deliveries, a measure of demand, dropped 4.1 percent from a year earlier to 18 million barrels a day, the lowest February level since 1993, the industry-funded group said in a monthly report today. (…)

February gasoline deliveries were 8.36 million barrels a day, down 3.1 percent from a year earlier and the lowest demand for the month since 2001, the API said.

Pointing up  Demand for ultra-low-sulfur diesel, the type used by the trucking industry, fell 6.1 percent to 3.21 million. Jet fuel consumption decreased 8.7 percent from a year earlier to 1.23 million barrels a day.

U.S. crude-oil production jumped 14 percent from a year earlier to 7.09 million barrels a day, the highest February output in 21 years. 

Click to View(Chart from Doug Short)

Lightning  LSE’s De Grauwe: Euro area in ‘deep trouble’

Paul De Grauwe, a professor at the London School of Economics, told Tom Keene on “Bloomberg Surveillance” today that the euro area is at risk because “so many big mistakes have been made.”
De Grauwe went on to say that the “ineptitude of policy makers” allowed Cyprus to “degenerate into systemic crisis” and that European leaders should not allow Russia to take over gas in Cypriot waters as it would allow Russia to “increase its near monopoly.”

“Merkel should go out to Cyprus, together with the rest of the euro zone, and make a deal and say we are going to set up an investment fund with you and the future proceeds of that will be part of the total package.”

“(…) of course, there have been stupidities in Cyprus, but refusing to help them out would make things even worse. So we should set aside our concerns that taxpayers in Germany and the other countries are not – do not like this. We should, at some moment, if we are in a union, right, you have to help each other out. If you don’t want to do that, you shouldn’t be in the union.”

Deep Trouble? En Français, Please


The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, fell from 43.1 in February, to 42.1.

Dragging the composite figure down was a faster decline in service sector business activity during March. The latest fall was the steepest since February 2009. Manufacturing output was also down markedly, but the pace of decline eased slightly to the slowest in three months.

Incoming new business also decreased at a sharper rate in March. Mirroring the trend seen for activity, the latest reduction in new work was the fastest in four years. Service providers and manufacturers both reported steeper reductions in new orders (in the case of the former, the fastest since March 2009). (…)  Manufacturers signalled that new export orders fell at the sharpest rate in three months(…) .

Backlogs fell at the steepest rate since September 2012, with service providers and manufacturers both signalling accelerated rates of decline.

Employment in the French private sector fell further during March. The pace of job shedding remained solid, despite moderating to the slowest in three months. Job losses were broad-based across services and manufacturing, and at similar rates.

Sentiment regarding future activity in the French service sector fell into negative territory during March, and reached its lowest level since December 2008.

France is the second largest economy in Europe, the fifth largest in the world. Thank God Germany is holding up. Cross your fingers:image

Volumes of new work received by private sector companies in Germany dropped for the first time in 2013 so far. March data indicated marginal falls in new orders in both the manufacturing and service sectors, with the former partly reflecting a renewed decline in new export business. Manufacturers cited softer demand from southern Europe, while demand was reported to have improved in Asia and North America. Some manufacturers also reported that inventory reductions among their clients had negatively influenced order intakes during March.

Storm cloud  German Business Confidence Falls

German business confidence deteriorated unexpectedly in March, following February’s sharp rise, the Ifo business survey showed, as manufacturers grew less optimistic about their export prospects.

The Ifo business confidence index declined for the first time in five months, to 106.7 in March from 107.4 in February.

Overall, companies’ business expectations for the next six months worsened, as the corresponding Ifo subindex declined to 103.6 in March from 104.6 in February. The roughly 7,000 companies participating in the Ifo institute’s monthly survey were also less satisfied with their current business situation. The corresponding subindex declined to 109.9 from 110.2 the previous month.

French Economy to Stay Stalled in First Half, Insee Predicts

Gross domestic product will be unchanged in the first quarter and expand 0.1 percent in the second, Insee said yesterday in a report. GDP hasn’t registered quarterly growth of more than 0.2 percent since the first three months of 2011 and has had three quarters of declines since then.

Italy’s stalemate unnerves investors
Four weeks after polling there is no sign a new government is near

(…) On Thursday Mr Monti’s government revised down its GDP forecast for 2013 to minus 1.3 per cent from its previous projection of a 0.2 per cent fall. Its 2013 budget deficit target was revised up to 2.9 per cent from 1.8 per cent because of the recession and thanks to plans approved by Brussels to raise debt by €40bn over the next two years to pay arrears owed by the public administration to the private sector.

“The big question is how long finances can hold if recession deepens,” Ms Carletti said. (…)


Yesterday`s flash PMIs revealed a world going on 1 1/2 cylinder as only a strong U.S. and an OK China are propelling the world economy. ZeroHedge adds this:

Goldman’s ‘Swirlogram’ places the global industrial cycle squarely in the ‘Slowdown’ phase as growth momentum fades rapidly. Driven by plunges in aggregate confidence levels and New Orders (less inventories) – as well as CAD and AUD data – this reinforces last month’s preliminary view of a slowdown beginning. Goldman notes we could potentially see weaker global activity over the coming months. Is it any wonder we are seeing bellweather names missing in a big (un-unique) way.


  • [image]Plywood Becomes Hot Item in Housing Recovery Growing demand and tight supplies have pushed up plywood prices by 45% in the past year. Now, Georgia Pacific and other U.S. producers are scrambling to get back up to speed after slashing output during the housing bust.

Georgia-Pacific, the largest U.S. producer of plywood, will announce Friday it plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.

He said plants have done what they can to add shifts and make smaller fixes to improve capacity, but now significant capital investment is needed.

  • Obviously, lumber prices are also up sharply:



Natural-gas prices rose above $4 a million British thermal units during intraday trading on Thursday and are up 73% from a year ago.

A chilly start to spring brought natural-gas stockpiles nationwide closer in line with average levels for this time of year. Further stoking the rally, traders and investors said, are signs that the boom in U.S. gas output is slowing, which could trim supplies even more. (…)

Less drilling “is definitely part of the equation,” he said. The number of rigs drilling for natural gas stood at 431 last week, down 35% from a year earlier, according to oil-field-services company Baker Hughes Inc. BHI -0.62%

The Department of Energy forecasts that the nation’s gas output will rise 0.7% this year, the smallest increase since 2005. (..)

Cold weather and slowing output growth are cutting into U.S. stockpiles. The amount of gas held in underground storage totals 1.876 trillion cubic feet, down about 21% in the past year, according to the latest Department of Energy data.


  • Health Insurers Warn on Premiums 

    Health insurers are privately warning brokers that premiums for many individuals and small businesses could increase sharply next year because of the health-care overhaul law.


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$ (25 FEBRUARY 2013)

The sequester and the fragile U.S. economy. Truck tonnage. Car sales. Rising inventories? ObamaCare. House prices. Canadian economy struggling. Social unrest. China’s PMIs. China housing. Earnings watch. Sentiment watch.


Long Impasse Looms on Budget Cuts

Lawmakers anticipate that looming spending cuts will take effect next week and won’t be quickly reversed, likely leading to protracted uncertainty that presents risks both to Congress and the president.

Never mind the political risks. How about the real world?


GDP could shrink in the first and second quarters — two consecutive declines is the popular definition of a recession — and stretch into the third quarter, according to Charles Dumas of Lombard Street Research in London — a prospect he says Wall Street is “blithely ignoring.” Federal spending could be reduced by 0.5% under sequestration, which would come atop the 1% fiscal tightening under the 2011 debt-ceiling agreement and 0.8% impact of the end of the payroll-tax cut on Jan. 1, he points out.

LEI – Is There A Disconnect? (Lance Roberts)


(…) the negative trend of the LEI since the turn of the century has not only been a reliable indicator of the maturity of the economic cycle but a cross below the ZERO bound has been closely associated with a market peak. However, with the Fed artificially suppressing the yield spread and boosting asset prices (both of which are major components of the index) through repeated QE programs the artificial inflation of the index is likely masking the weakness in the economy.

Speaking of underlying weakness in the economy – the next chart is the annual change in the LEI versus the annualized growth rate of GDP.


(…) Historically, when the annual rate of change in the LEI drops below zero the economy either has been, or was close to, a recession.  At a current reading of 2.06% there is not a tremendous margin for error with regards to missteps with either fiscal or monetary policy.  Furthermore, as discussed recently, with the global recession already providing a drag on the domestic economy – any drastic moves toward austerity could easily push the economy over the ledge. (…)

ATA Truck Tonnage Index Posts Best Ever January (via CalculatedRisk)

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.9% in January after jumping 2.4% in December. … Tonnage has surged at least 2.4% every month since November, gaining a total of 9.1% over that period. As a result, the SA index equaled 125.2 (2000=100) in January versus 121.7 in December. January’s index was the highest on record. Compared with January 2012, the SA index was up a robust 6.5%, the best year-over-year result since December 2011.

“The trucking industry started 2013 with a bang, reflected in the best January tonnage report in five years,” ATA Chief Economist Bob Costello said. “While I believe that the overall economy will be sluggish in the first quarter, trucking likely benefited in January from an inventory destocking that transpired late last year, thus boosting volumes more than normal early this year as businesses replenish those lean inventories.” (emphasis added)


Inventory restocking seems to be confirmed by rail traffic. Intermodal volume has been very strong in the past several weeks.

The problem with the above is that the consumer is 70% of the U.S. economy and indications are that consumer spending has stalled. Restocking could rapidly lead to destocking.

ISI company surveys revealed softness from truckers and retailers and restaurants last week while manufacturers and homebuilders improved.

Pent-Up Demand Drives Auto Sales

More than 1.2 million new vehicles were estimated to have been sold in the month, a 4.3% increase over a year earlier and a 15% increase over January, according to If accurate, that would put the seasonally adjusted annual rate at 15.5 million vehicles. (…)

Analysts, however, will be searching Friday’s reports for signs that auto makers may be too far ahead of the sales curve (…)

ObamaCare’s Tax Net Snares Middle Class, Economy

When the subsidized exchanges open in 2014, ObamaCare will become a redistribution program. This year, it’s primarily a tax collection program.

The health law will shrink the fiscal 2013 deficit by $34 billion due to $36 billion in revenue, the Congressional Budget Office predicts.

Thus, ObamaCare’s ramp-up will be an economic drag, made steeper by employers’ shifts to avoid fines that kick in next year.

While much of the new taxes will come from high earners, ObamaCare’s tax net will be impossible to avoid for the middle class. Pretty much anyone who uses medical care will pay up, since fees on insurance policies, prescription drugs and medical devices are sure to be passed along to consumers.

Likewise, tax penalties for employers who fail to offer affordable and comprehensive coverage would come at least partly out of wages for moderate earners.

In all, ObamaCare is expected to raise about $800 billion in revenue over 10 years, including penalties on individuals and firms for not complying with new mandates.

January Annual Home Value Increase Is Largest Since Summer 2006

Zillow’s January Real Estate Market Reports, released today, show that national home values rose 0.7% from December to January to $158,100. January 2013 marks the 15th consecutive month of home value appreciation. On a year-over-year basis, home values were up 6.2% from January 2012 – a rate of annual appreciation we haven’t seen since July 2006 (when the rate was 7.5%), before the peak of the housing bubble.


The rental market remains strong, even as the housing market regains strength. (…) Investors are still playing a big role in the housing recovery, as they purchase homes (many times lower priced homes or distressed inventory) and convert these into rental units to satisfy the increase in demand for rental housing. Their involvement in the marketplace has often squeezed out first-time buyers and has contributed to high home value appreciation. (…)

Pointing up  Fig4The rate of homes foreclosed continued to decline in January with 5.54 out of every 10,000 homes in the country being liquidated. Nationally, foreclosure re-sales continued to fall, making up 13.05% of all sales in January. This is down 3.6 percentage points from January 2012 and down 6.9 percentage points from its peak level of 19.9% in March 2009.

See also: 2 Million Homeowners Freed From Negative Equity in 2012; 1 Million More to Come in 2013


Canada’s Economy Struggles as Inflation and Sales Slow

Canada’s inflation rate fell in January to its lowest since 2009 and retail sales plunged in December, adding to evidence the country’s economy is struggling to accelerate from its slowest pace since the 2009 recession.

Consumer prices rose 0.5 percent in January from a year earlier, the least since October 2009, Statistics Canada said today from Ottawa. Retailers in December recorded a 2.1 percent drop in sales, the biggest decline in almost three years, the agency said separately.

France asks Brussels for budget pass
Finance minister seeks extra year to hit deficit targets Surprised smile
Risk of instability hangs over Italy poll
Result that yields strong government ‘would be a miracle’
Social Unrest In Europe? (BCA Research)

Three crucial stabilizing factors have de-fused the risk of an imminent social explosion in Europe.

  • First, in the powder keg that ignites major social unrest one vital ingredient is missing: inflation. An INSEAD study of social upheaval shows that the young can tolerate unemployment so long as prices are stable, and they expect a brighter future when they eventually find jobs. The good news is that inflation in Europe’s troubled economies is well contained, and coming down.
  • The second stabilizing factor is the role of the family as a vital shock absorber. For example, note that the countries with the highest youth unemployment rates are also the ones with the highest proportion of young adults living with their parents. Effective transfers at the family level are providing the young jobless with essential economic and social support.

Social Unrest In Europe

  • Third and probably most important the official unemployment numbers in some European countries are a fiction. It is an open secret that many of the officially jobless in countries like Greece and Spain are actually working in the shadow economy which encapsulates activity that is unrecorded, unregulated, and untaxed.

Bottom Line: The social, political and economic stability of Europe is much greater than widely believed. Hence, any sell-off on renewed social or political tensions in the coming weeks or months is a possible opportunity to shift into euro area assets.

I don’t subscribe to that view. Today’s youth has little patience. I expect a hot spring in Europe.

UK loses triple A credit rating  Moody’s action cites deteriorating outlook

Sterling hits two-year low on downgrade Moody’s action rattles currency in final minutes of trading


China’s farm produce prices down  Farm produce prices in China have seen a marked decline since mid-February, according to a survey conducted by Xinhua News Agency.

The average price of 21 monitored vegetables declined 11.2 percent from February 10-22, while the price of eggs was down 0.4 percent, said the survey released Friday.

The price of pork, a staple meat in China, dipped mildly, but the price for chicken held steady. Prices of beef and mutton also nudged down.

Food prices account for about one-third of the prices used to calculate the consumer price index (CPI), a main gauge of inflation, in China.


The overall index rose sharply to 61.8 in February. The New Orders index rose again.


High five  Note: this MNI index goes totally against this morning’s Markit flash PMI.

Is China’s Property Market Topping Out?

Investing in property is very important to Chinese people, who are unable to easily move their money overseas and distrustful of the stock market. According to Jing Ulrich, a property cycle in China only lasts about 14 months from beginning to end.

(…) Chinese home buyers in tend to put down a lot more cash and borrow less than their Western counterparts, so interest-rate hikes have less impact on the market. Instead, the government has used requirements for minimum down payments and restrictions on buying multiple homes to cool things down.

Though they never formally relaxed the rules, Ms. Ulrich said authorities judiciously started taking a more laid back attitude to enforcement when it became clear the market was stuttering in the second half of 2012.

Now she is on the lookout for renewed signs of zeal in enforcing the curbs, which would be the easiest way to suppress demand. Buying restrictions could also be extended beyond the 40 or so cities where they are now in force. (…)

Vietnam Inflation Rate Eases as Economy Struggles to Revive  Vietnam’s inflation eased in February as domestic consumption struggled to rebound after a credit crunch that slowed economic growth to a 13-year low.

Consumer prices climbed 7.02 percent from a year earlier after rising 7.07 percent in January, the General Statistics Office in Hanoi said today.

The World Bank in December forecast that Vietnam’s economy will expand 5.5 percent this year, which would mark a third straight year of below-6-percent growth. The increase in gross domestic product averaged 7.3 percent annually in the first decade of this century.


Q4 earnings season ends this week. Factset on S&P 500 companies:

Of the 429 S&P 500 companies that have reported earnings to date for the fourth quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 69% recorded over the past four quarters. (…)  In terms of revenues, 66% of companies have reported sales above estimates. This percentage is well above the average of 50% recorded over the past four quarters.

Bespoke on NYSE companies: Earnings Season Ends with a Thud

Not only did the season end on a down note regarding the market, but the underlying earnings numbers fell hard this week as well.  As shown below, the final reading for the percentage of US companies that beat Q4 earnings estimates was 61.4%.  This is still a solid number compared to recent quarters, but it actually fell 2.2 percentage points this week.  Of the 252 companies that reported this week, only 48% beat earnings estimates, causing the overall beat rate to drop from 63.6% down to 61.4%. While it hasn’t been mentioned, maybe weak earnings has been a key reason for the market’s drop this week.


The revenue beat rate ended at 62.7% for the fourth quarter reporting period.  As shown below, this is much better than what was seen in the prior two quarters, and it’s the exact same beat rate that was seen during the Q1 2012 reporting period.  Just like the earnings beat rate, the revenue beat rate also fell this week, dropping 1.3 percentage points from a reading of 64% last Friday.


The official S&P tally as of Feb. 21:

Of the 445 companies having reported, 65.8% beat and 24% missed earnings estimates. Ex-IT companies which beat by 83%, the beat rate drops to 62.8%.

Pointing up Q4 EPS are now seen at $23.28, down $0.04 from last week and $0.55 (-2.3%) from Jan. 31. This is the lowest earnings level since Q1’11. It also marks the second consecutive Y/Y decline (-5.1% in Q3).

Trailing 12-month EPS now total $96.95, down 0.5% from Q3’12 and 1.8% from Q2’12. Valuation based on trailing earnings is now facing a mild headwind after enjoying a strong tailwind since mid 2009 (EPS +149%).

Q1’13 estimates remain upbeat at $25.57, +5.5% Y/Y, even though they keep declining albeit at a slower rate lately. If met, trailing earnings would resume growth and reach $98.28 after Q1’13.

Note this, however:

Corporations and analysts are lowering earnings expectations for Q1 2013. In terms of preannouncements, 72 companies have issued negative EPS guidance for Q1 2013, while 23 companies have issued positive EPS guidance.


As of last week, nearly 20% of the S&P 500 companies have pre-announced and 76% were negative. The last few weeks seem to have been particularly difficult for consumer-centric companies. This could begin to hit producers potentially facing excess inventories. Then there is the looming sequester which will hit a host of companies which may have been hoping for a solution that now seems elusive. The risk is clearly tilted toward negative earnings surprises. Read on:

Darden Cuts Guidance, Citing Payroll Tax, Gas Prices

Darden Restaurants Inc., which owns Olive Garden and Red Lobster, cut its fiscal-year profit and revenue outlook, citing “headwinds” from consumers pinched by higher payroll taxes and gasoline prices.

Its less-rosy view comes amid similar warnings from U.S. food and retail chains that have blamed the economy for slowing sales. (…)

“While results midway through the third quarter, [which will end Sunday], were encouraging, there were difficult macroeconomic headwinds during the last month,” Chief Executive Clarence Otis said. Two of the most prominent culprits were increased payroll taxes and rising gasoline prices. (…)

Restaurant analyst Bonnie Riggs, from market research firm NPD Group Inc., said that three weeks ago, which is about when consumers likely saw the impact of the higher payroll tax in their paychecks, restaurants reported a 4% decline in same-store sales, marking the first industrywide, weekly decline that NPD has seen in more than a year and a half. (…)

For the year, Darden now expects earnings from continuing operations of $3.06 to $3.22 a share on sales growth of 6% to 7%, down from its previous view of $3.29 to $3.49 a share in earnings on 7.5% to 8.5% sales growth.

Darden said it expects fiscal third-quarter earnings from continuing operations between $1 and $1.02 a share, below estimates of $1.13 from analysts surveyed by Thomson Reuters.

Q3 will miss by 11% while full FY mid-point EPS are shaved 8%. Big impact.


RBC Capital Markets’ latest sentiment indicator:

Bullishness recently hit its highest level since July 2005 according to our
sentiment indicator. Of the six components that comprise the composite, only the CBOE Put/Call Ratio and the AAII Bull Ratio stand at relatively depressed readings. Unbalanced optimism sets the stage for a pullback in share prices, one in which investors will need to decide whether to lean into or against.



(…) The Standard & Poor’s 500-stock index has gone 505 days without a correction, deemed a 10% drop from a recent high. Since 1962, the index has rallied for at least 500 days without a correction during five separate instances, according to data provided by stock-market research firm Birinyi Associates.

In all five rallies, stocks averaged another 9.2% gain over the next six months and a 13% increase over the ensuing one-year time frames. (…)

“This market’s rally without a 10% pullback is not out of the ordinary,” Kevin Pleines, research analyst at Birinyi, told MarketBeat. He said there is little historical merit to the notion that the market is overdue for a sizable drop. (…)

In a note to clients on Friday, Thomas Lee, chief equity strategist at J.P. Morgan, advocated some near-term caution. He said the S&P 500 would look more compelling if it fell to the 1400-to-1450 range.

Such a drop would be consistent with patterns that have played out since the market bottomed in March 2009. On average, rallies have lasted 55 days and risen 18% in between 5% pullbacks over the last four years, according to research firm Stone & McCarthy Research Associates.

Lately, the S&P 500 has risen 12% throughout the last 66 trading days since its most recent pullback that concluded in mid-November. There have only been four other instances throughout the last four years in which the market has rallied for a longer period of time without at least a 5% pullback, the research firm said.

“We think there could finally be a minor pullback at any time,” said Mark Arbeter, chief technical strategist at S&P Capital IQ. “While we continue to think that the market will grind higher in the weeks to come, risk appears to be rising and the call from here may get a little trickier.”

But on a longer-term time horizon, the rally may have more momentum behind it.

“We are still positive on stocks and believe the bull market will continue,” said Birinyi’s Mr. Pleines. (WSJ)