NEW$ & VIEW$ (14 MAY 2013)

Posted on May 14, 2013 by Denis Ouellet

Retail Sales Gain Shows Resilient American Consumer

The U.S. retail sales report showed that figures used to calculate growth, which exclude categories such as gasoline and automobiles, climbed 0.5 percent for the second time in three months.

Nine of 13 major retail sales categories showed gains last month, led by a 1.2 percent advance at clothing stores, the biggest in more than a year, according to today’s report. Receipts at general merchandise outlets, which include department stores, climbed 1 percent, the most since March 2012.

Cars and light trucks sold at a 14.9 million annual pace in April, down from a 15.2 million rate the prior month, according to data from Ward’s Automotive Group. The average for the first quarter was 15.3 million, the strongest since the same period in 2008 and a sign the longer-term outlook remains positive. (Chart from Haver Analytics)

Markit provides more details:

US retail sales rose 0.1% in April, according to official data, representing a welcome improvement after sales had dropped 0.5% in March (revised from -0.4%). Core sales, which exclude building materials, car dealers and gasoline, were even perkier, rising 0.5% after a 0.1% increase in March.

Core retail sales in the three months to April were up just 0.9% on the previous three-month period; the weakest rate of expansion since last October and down from 1.3% at the start of the year.

However, weekly chain store sales actually peaked at the end of April and have declined 3% sequentially during the last 2 weeks. Not new for this volatile series but the 4-week moving average has clearly rolled over and is now only up 2.0% YoY.

Small Business Optimism Up in April

The Index gained 2.6 points, rising to 92.1. That beats falling, but it is
barely above the recovery average of 90.7, making it another very poor
reading. Four Index components rose, 2 fell, 6 were unchanged, a lot of
“noise”, no clear direction. Owners are very pessimistic about the
economy, with a net negative 15 percent expecting business conditions to
be better in 6 months. As bad as that sounds, it was a 13 percentage point
improvement over March.

Economists Cut China Forecasts

Many economists are cutting their forecasts for China’s economic growth this year after a fourth month of disappointing data prompted fresh looks

A survey of 18 economists by The Wall Street Journal late last year showed the median forecast for economic growth in 2013 at 8%, up from the 7.8% rise China’s economy posted last year.
But now the numbers are telling a different story. A new survey of 12 economists this week showed that the median forecast has since fallen to 7.8%.

The chart illustrates what I pointed out yesterday.

Industrial production up by 1.0% in euro area

In March 2013 compared with February 2013, seasonally adjusted industrial production grew by 1.0% in the euro area (EA17) and by 0.9% in the EU27, according to estimates released by Eurostat, the statistical office of the European Union. In February production increased by 0.3% in both zones.

A turn? Only very cold weather that boosted energy production in February and March. Still, cap. goods and durable cons. goods, though volatile, are perking up.

German Investor Confidence Rose Less Than Forecast in May

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, increased to 36.4 from 36.3 in April.

ZEW’s gauge of the current situation fell to 8.9 from 9.2 in April.

EARNINGS WATCH

Updated Q1 Earnings Season EPS and Revenue Beat Rates

About 500 companies reported earnings last week, pushing the total number of companies that have reported this season up to more than 2,100. And while the market is up on the week, earnings haven’t been great. At the start of the week, the percentage of companies that had beaten earnings estimates this season stood above 59%. The additional 500+ companies that reported this week only beat earnings at a 52% rate, pushing the overall earnings beat rate down to 57.6%. As shown below, this would be the weakest reading of the entire bull market if earnings season ended today.

Guidance Spread Negative But Inching Higher

More than 2,000 companies have reported earnings so far this season, which ends next Thursday when Wal-Mart (WMT) reports. So far this season, the spread between the percentage of companies raising guidance minus those lowering guidance has been -2.9 percentage points. This means that more companies have lowered guidance than raised guidance, and if it holds in negative territory, it will be the seventh straight quarter with a negative guidance spread. As shown in the chart below, the spread this season is much better than it was in the prior three quarters. If we hear positive things from companies next week before earnings season ends, the spread could get a little better even. That being said, it’s pretty amazing that companies have had a negative slant regarding the future for nearly two years now, and over this time period the market has soared. What would the market be doing if companies were actually optimistic? Who knows with so much attention paid to Bernanke and his easy money policy.

And this from ISI: revisions remain negative.

That equities/commodities disconnect

The moves are logical. Stocks are up because of rampant QE, which is squeezing investor flows out of bond markets and into equities. And the reason we’ve got rampant QE is the continued lack of near-term economic recovery globally, which is manifestly bad for industrial commodities.

I thought QEs were supposed to lift all asset classes. Well, there is something called supply in the demand/supply equation…

OIL: This is now a front page story (see Facts & Trends: The U.S. Energy Game Changer):

IEA: North American Oil to Dominate World Supply Growth North American oil production will dominate world-wide supply growth over the next five years, the International Energy Agency predicted, the result of growing production from “fracking” and other technologies.

In its most recent analysis, which takes a five-year view of the oil market, the IEA said U.S. production is rising much faster than previously forecast as a result of sustained high prices and more-efficient operations.
The latest forecast marks a shift in the IEA’s previous thinking, which saw supply growth split between OPEC and non-OPEC countries in the medium term. The fast U.S. supply growth has diminished U.S. demand for oil from OPEC members like Nigeria, and in the long term, growing U.S. exports of oil and natural gas could further weaken OPEC, says Amy Myers Jaffe, who studies energy and the oil industry at the University of California at Davis but didn’t know the contents of the IEA report. (…)
According to the IEA, average North American production is expected to grow by 3.9 million barrels a day between 2012 and 2018, accounting for more than half of the increase in non-OPEC production for the period.
(…) the IEA expects demand for OPEC oil to fall below 30 million barrels a day—the organization’s self-imposed production ceiling. IEA expects that trend to endure until 2018. (…)
According to the IEA’s projections, average OPEC production capacity will rise by 1.75 million barrels a day between 2012 and 2018 to reach 36.75 million barrels a day by the end of the period. The previous estimate pegged OPEC production capacity between 2011 and 2017 to grow 3.34 million barrels a day to 37.54 million barrels a day in 2017.
These changes coupled with the continuing rise in Asian demand will have a profound impact on the market over the next five years, the IEA said.
“There is hardly any aspect of the global oil supply chain that will not undergo some measure of transformation over the next five years, with significant consequences for the global economy and oil security,” the IEA said.

SENTIMENT WATCH

IPOs Set to Raise Most Cash Since Crisis

U.S. companies are on track to raise the most money through initial public offerings since before the financial crisis, driven by the same thirst for risk among investors that has pushed the stock market to new highs.

Already this year, 64 U.S.-listed public offerings have raised $16.8 billion, according to Dealogic. In the same period in 2012, the biggest year in dollars since the financial crisis, 73 companies raised a total of $13.1 billion. Last week alone brought 11 U.S.-listed IPOs, making it the busiest week for such deals since December 2007.

The largest 25 IPOs this year have risen on average 22% from their initial prices, according to Dealogic, versus a 15% gain for the Standard & Poor’s 500-stock index since the beginning of the year.

NEW$ & VIEW$ (6 MAY 2013)

Posted on May 6, 2013 by Denis Ouellet

Job Gains Calm Slump Worries

Nonfarm payrolls rose by 165,000 last month and the jobless rate ticked down to 7.5%, the lowest level since December 2008. The Labor Department also significantly raised hiring estimates for the two prior months, by a combined 114,000 jobs. (…)

The increase in 176,000 private-sector jobs, on top of a loss of 11,000 government jobs, was concentrated in a handful of service industries. The professional and business-services sectors added 73,000 jobs, including 31,000 temporary workers. Manufacturing employment stalled and construction employment contracted after gains earlier in the year.

High five But, as Markit notes:

So far this year, 783,000 new jobs have been created, comprised of a 813,000 rise in the private sector and a 30,000 drop in government jobs. That compares less favourably with last year, when a 899,000 increase
was seen in the four months to April, buoyed by a 916,000 increase in the private sector.

Sad smile In reality, after 4 months, the U.S. economy, still on hyper-strong financial heroin, has created 13% fewer jobs than during the same months in 2012.

Americans actually worked less last month because of a 0.2- hour drop in the workweek, resulting in total hours worked dropping 0.4% for the month. The U-6 underemployment rate, which covers folks who are working part-time but want full-time gigs or have stopped looking for work, ticked up to 13.9% from 13.8%, the first rise since last July, Philippa Dunne and Doug Henwood of the Liscio Report note. And in the household survey, some 306,000 joined the ranks of the self-employed, more than the total 293,000 overall gain. (Barron’s)

And this from NBF:

Private employment expanded by a consensus-beating 176,000 during the month. The rise, however, was not widespread as only 53.9% of industries increased their headcounts, the lowest proportion in eight
months (the goods sector actually shed 9,000 jobs in April).

The end result is that aggregate hours worked are only up an annualized 0.14% early in Q2, the weakest showing since Q4 2009. As today’s Hot Chart shows, this development is consistent with a significant slowdown in real nonfarm business GDP.

Spring Swoon Alive and Well in Manufacturing

The manufacturing sector failed to add any jobs last month after a meager 2,000 increase in March payrolls, a black spot on the otherwise rosy jobs report. Those numbers add to other economic data showing that demand for factory goods is falling and the sector is seeing a broad slowdown this spring. And that spring swoon could turn into a summer slide.

(…) with car sales slowing and dealer inventories climbing, the auto industry growth is likely to ease. (…)

Vehicle sales peaked in November and have fallen in four of the past five months but auto production continued at double-digit year-on-year rates through March, he said. That disconnect could result in longer summer shutdowns or slow down at some factories, robbing manufacturing of one of its growth engines.
If the auto sector is starting to sputter, the defense industry has stalled. Military factory orders plunged 34% in March, the month across-board-government cuts backs known as the sequester began. Defense spending has been volatile in recent months, but is down 25% from a year ago. (…)

Factory Orders Fell 4% in March

Demand for U.S. factory goods in March fell 4% to a seasonally adjusted $467.29 billion, the latest evidence that manufacturing sector began to slow during the month.

(…) Orders for long-lasting items, including cars and machinery, fell 5.8%, slightly worse than last week’s initial estimate.
Demand for civilian aircraft and parts fell 48.3% in March. Orders for metals dropped 3.2% and machinery demand eased 0.8%.
Meanwhile, March orders for nondurable products, reported for the first time Friday, fell 2.4%. (…) Petroleum refining fell 7.3% in March, partially reflecting lower prices. Food processing, clothing and chemical production also declined during the month. (…)
Defense capital goods orders fell 34.4% in March, the first month of the so-called sequester.
Outside of defense, factory orders fell 3.5%
Total factory shipments, including durable and nondurable goods, decreased 1% during March, compared with small gains the prior two months, the Commerce Department said. (…)

ISM Services Weaker Than Expected

This was the lowest reading since last July. Combining both the ISM Manufacturing and Services indices based on their weighting in the overall economy, the ISM for April came in at 52.8 versus last month’s reading of 54.0.

EUROZONE RETAIL SALES KEEP FALLING

Total retail volume fell 0.1% MoM in March after a 0.2% decline in February. Real retail sales have dropped 0.4% since September 2012. Core sales volume slumped 0.5% in March, following a 0.7% drop in February. Core sales volume is down 1.0% since September 2012.

This Eurostat data is for March. Markit’s retail PMI released last week said that sales continued to decline at a “sharp rate” in April:

Spanish Jobless Claims Dwindle

The ministry said the number of people filing for jobless benefits fell 0.9% in April from the prior month, to 4.99 million. Although the figures aren’t adjusted for distortions caused by seasonal trends, they show the second-largest fall in joblessness for any April since 2007, before the global financial crisis later that year sparked a deep recession across Europe in 2008 and 2009 from which countries have struggled to recover.

Portugal Unveils Budget Cuts

The prime minister’s plan would cut the number of public employees by 5%, lengthen their workweek and raise the retirement age by a year, to 66.

The plan, which aims to save €4.8 billion ($6.1 billion) through 2015, is certain to face resistance from the Socialist-led opposition and trade unions.

The government has promised to cut its budget deficit to 3% of gross domestic product by 2015, two years later than initially planned and the year Mr. Passos Coelho’s term ends. Last year’s deficit was 6.4%.

France Says Austerity Over on Germany Flexibility

French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies. (…)

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3 percent of GDP this year. The shortfall will amount to 3.9 percent of GDP this year and 4.2 percent next year with no policy change, the commission said.
There is a “certain flexibility” in allowing France, as well as Spain, to meet its deficit targets, Schaeuble told the Bild am Sonntag newspaper in an interview published yesterday. “This comes with clear conditions for the necessary reforms. The commission will make concrete proposals by the end of May which then will be discussed and decided upon among the euro area finance ministers.” (…)

Indonesian growth slips to two-year low Domestic consumption helps keep growth above 6%

(…) Gross domestic product grew 6 per cent in the first quarter compared with a year earlier, according to government data released on Monday, lower than the 6.1 per cent delivered in the last quarter of 2012.
(…) the breakdown of the GDP data shows that the pace of growth in investment across the economy is starting to slow because of the knock-on effects of lower export commodity prices.

Australia Retail Sales Fall

March retail sales were down 0.4% from February, the Australian Bureau of Statistics reported Monday, whereas economists had expected a 0.1% increase. First-quarter sales, meanwhile, rose by 2.2%—the biggest quarterly gain in six years—as consumers took advantage of heavy price discounts offered by retailers. (…)

Australian retail sales declined toward the end of last year as the mining-dominated economy slowed alongside China, the nation’s biggest trading partner. They rose 1.3% in January and February, though, as house prices and consumer sentiment picked up.

EARNINGS WATCH

The earnings season is near complete as 84% of the S&P 500 companies have declared Q1 results. The beat rate computed by S&P is at 69% while the miss rate is at 22.7%.

Q1 earnings are now estimated at $25.78, up from the March 28 estimate of $25.49 but down from last week’s surprising $26.20 number. Nearly 28% of the 97 companies reporting last week missed (vs 21% up to then), including 44% of companies in Consumer staples (vs 14%), IT (21%) and Utilities (33%).

In addition, Factset calculates that 63 S&P 500 companies have issued negative EPS guidance for Q2 2013, while 17 companies have issued positive EPS guidance. While the 79% negative ratio is not much different than that preceding Q1, there is some concern in the fact that 63 companies have guided negatively so far this season compared to 50 at the same stage in Q1, although there have been 17 positive pre-announcements this year, up from 11 last year.

In light of the above, analysts are busy revising their estimates: while Q1 EPS remain 1.1% above their March 28 forecast, current estimates for the next 3 quarters are now 2.5%, 1.7% and 1.0% lower than their March 28 estimates.

In all, EPS (per S&P) are estimated up 6.4% YoY in Q1, +5.3% in Q2, +16.4% in Q3 and +27.3% in Q4 for full years earnings up 13.6% YoY to $109.94. We will see how that evolves in coming weeks…FYI, this chart from S&P shows the incessant decline in 2013 estimates. My experience with estimates is that a good rule of thumb is that yearly estimates are generally 15% too high, meaning that it would be safer to use EPS around $101 for 2013 if you wish to use forward earnings.

For now, trailing earnings should reach $98.36 after Q1, up 1.6% from trailing EPS after Q4’12. Trailing earnings remain within their very narrow $97.40-98.70 range of the last 5 quarters, confirming that earnings have completely stalled since the end of 2011.

Unsurprisingly, this has coincided with a complete flattening of revenues since Q4’12. Q1’13 revenues are estimated up 1.5% YoY but down 0.5% from their Dec. 2011 level. It is, indeed, very difficult to grow earnings when revenues stall. Here’s what Moody’s wrote last week, to be read in the context of deteriorating conditions in the economies of most of the U.S. trading partners:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by US merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.

U.S. exports have declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.

This is why second half earnings growth projections of more than 20% appear rather heroic at this juncture.

While trailing earnings stalled, equities have roared ahead +21.8% since May 2012. During that period, U.S. inflation has declined from 2.3% to 1.5%. Under the Rule of 20, such a decline in inflation raises the fair PE by 4.5% (from 17.7 to 18.5). The remaining 17.2% advance in equity values is a re-rating of equity markets from a 27% undervaluation to a 12% undervaluation as of last Friday.

On the above chart, notice how the Rule of 20 Fair Index Value (yellow line) has moved sideways during the last 12 months while the S&P 500 Index (blue) has jumped. Stable earnings and inflation caused the sideway movement in fair value. This is why the Rule of 20 Value (black) has gone up from its May 2012 15.1 reading to its current 17.6.

Syria Strikes Raise Alarm

Strikes that Syria attributed to Israel hit an area around a research facility near Damascus, raising concerns of a widening conflict

NEW$ & VIEW$ (2 MAY 2013)

Posted on May 2, 2013 by Denis Ouellet

Initial Jobless Claims: -18K to 324K vs. 345K consensus, 342K prior (revised).

U.S. Vehicle Sales Move Lower

After several months at the highs for the economic recovery, U.S. vehicle sales have begun to decline. Unit sales of light motor vehicles during April fell 2.3% m/m (+5.7% y/y) to 14.92M (SAAR) according to the Autodata Corporation. These sales compare to the recovery peak of 15.54M in November. Sales disappointed expectations for 15.3M according to Bloomberg.

U.S. Construction Spending Reverses Earlier Rebound

Reversals and revisions can change the picture of an economic series. Such was the case with the latest construction put in place numbers. Building activity fell 1.7% (+4.8% y/y) in March and reversed a 1.5% February rise. Moreover, it added to a 4.0% January decline which was double the last estimated drop. As a result, the level of construction activity was 4.1% lower than at yearend 2012.

Fed Steps on Gas as Inflation Slows

The Federal Reserve said it would press forward with an $85 billion-a-month bond-buying program and hinted it might even dial it up. The move comes amid a U.S. and global inflation slowdown.

(…) the Fed, in a statement released after Wednesday’s meeting, evinced no sign it is leaning toward pulling back. Instead, it struck a more neutral tone and emphasized it could “increase or reduce” the size of its monthly bond purchases, depending on inflation and job growth in the months ahead. (…)
“Fiscal policy is restraining economic growth,” the Fed said bluntly about U.S. tax and spending policies aimed at short-term budget-deficit reduction. Fed Chairman Ben Bernanke has called on the Obama administration and Congress to agree to a budget plan that reduces deficits in the long run without cutting much right away while the economy is weak.
The global inflation slowdown is one of the more surprising developments confronting the Fed and other central banks, and has become more apparent in recent few weeks. (…)
The U.S. Commerce Department reported Monday that consumer prices rose just 1% in the 12 months ending in March, well below the Fed’s 2% target. In the 17-member euro zone, inflation hit 1.2% in April, the lowest rate in more than three years and also well below the ECB’s target of just under 2%. (…)
Several indicators suggest inflation pressures have receded in recent weeks. Futures prices for commodities, including oil, cotton, sugar and gold, are all down from a year earlier.

U.S. ISM Composite Factory Sector Index & Prices Weaken Further

The April composite index of manufacturing activity from the Institute for Supply Management slipped to 50.7 from an unrevised 51.3 in March. During the last ten years, there has been a 69% correlation between the ISM index and the q/q change in real GDP.
Leading the overall index down was a lower employment reading. The sharp decline to 50.2 brought it to nearly the lowest level of the economic expansion. During the last ten years there has been an 88% correlation between the employment index and the m/m change in factory payrolls.
Also down sharply last month was the inventories series (46.5). Offsetting these declines were gains in supplier deliveries (50.9), a rise which indicated slower delivery speeds, production (53.5) and new orders (52.3). The new export orders index (54.0) also fell m/m but remained much higher than the November low of 47.0.

Alcoa Battling Aluminum Surplus

Alcoa Inc. said it will consider cutting up to 11% of its current smelting capacity as the U.S. aluminum giant tries to weather low prices for the industrial metal.
Aluminum prices have fallen by more than one third since 2011 due to a prolonged slump in the raw-aluminum market.
Russia’s United Co. Rusal PLC, the world’s largest producer of aluminum by volume, has already announced plans to reduce output by 300,000 tons, or 7% of production, in 2013, and permanently close 275,000 tons of capacity by the end of 2015.
(…) it is up to big aluminum makers outside China to cut production and aim for a total reduction of 1.5 million tons over the next three years, he said. “Industrywide, it should be a common agenda,” he said. Global production of raw aluminum reached 45.2 million tons in 2012, up 33% from 33.9 million tons in 2006.
Those cuts would be in addition to 568,000 metric tons, or 13%, of smelting capacity that the company currently has idle.

U.S. Case-Shiller Home Price Index Posts Stronger Increase

Home prices are generating improved upward momentum throughout the country. The seasonally adjusted Case-Shiller 20 City Home Price Index increased 1.2% (9.4% y/y) during February and built on a 1.0% January rise. The 3-month annualized rate of increase of 13.4% was the strongest since late-2005. Home prices in the narrower 10 city group rose 1.2% (8.6% y/y) in February.

Six Months After Sandy, Small Firms Struggle

Six months after Hurricane Sandy slammed into the Eastern Seaboard, thousands of entrepreneurs and small-business owners up and down the coast are struggling to get back on their feet.

SENTIMENT WATCH

Russell 2000 Back Below 50-DMA

The Russell 2000 is having an especially bad day today with a decline of just under 2%. This puts the index on pace for its worst day since April 15th’s 3.78% decline. Today’s decline has put the Russell 2000 back below its 50-day moving average as well. More importantly, though, while the S&P 500 closed at an all-time high yesterday, the Russell 2000 made its second lower high since March 15th. Not a good sign for smallcaps and the broad economy.

Is it time to sell in May and go away?

This is from Zacks Research which clear shows its bias (my emphasis), before yesterday’s drop:

For starters, each May is different. And there have been some VERY profitable summers in years past. So it’s never wise to just take this saying at face value and truly walk away from the markets. (In fact, if things looked really bad, then it’s best to short the market).

The resilience of stocks to be pressing all-time highs after 3 straight weeks of soft economic reports (including a scary showing for Chicago PMI in contraction territory) is making it hard to say what exactly would make stocks go lower at this stage. Meaning that investors seem quite comfortable with the ebb and flow of Muddle Through Economic growth. And as long as the Fed is on the side of investors, with all that QE, then no reason to walk away.

Doug Short remains objective:

Market lore is full of monthly associations: The January Effect, Sell in May and Go Away, Summer Rallies, the September Slump, Manic-Depressive October, December Rallies, etc.
The first chart shows the average monthly gains/losses, excluding dividends, since 1928 for all twelve months. May is one of the three months with a negative average. Incidentally, the monthly average of all months lumped together is 0.59%. So May has underperformed the mean by 0.73%.

The next three charts divvy up our 85-year period into three parts: 1928-1949, 1950-1981, and 1982-present. The rationale is that the first chart includes the Crash of 1929, Great Depression, WWII, and ends around the time of the secular market bottom in 1949. The second chart covers the cycle from the beginnings of the post-war rally through the Decade of Stagflation and market bottom in 1982. The third chart begins with the great Boomer market that followed and runs to the present.

May has been a performance laggard in two of the three timeframes and the worst performer in one of the three (1950-1981).

Lest the charts above give the false impression that May is a consistently poor performer, let’s close with a distribution of performance over the past 85 years.

Across the entire 85-year timeframe, May has an average of -0.14%. But if we exclude the three negative outliers, the average jumps to 0.59%, which is spot on the overall monthly mean. Pretty amazing!

Let’s hope May 2013 behaves more like it did in 1933 and not like one of those naughty negative outliers (or any of the red markers, for that matter).

NEW$ & VIEW$ (1 MAY 2013)

Posted on May 1, 2013 by Denis Ouellet

It seems that U.S. housing is the only area offering fresh positive stuff these days. That is if you are not in the market for a new house.

Housing Market Heating Up

Home prices are rising at the fastest rate in seven years, as buyers return to a market where property is in short supply.

Prices increased 9.3% in February from a year earlier while mortgage-interest rates hovered near record lows, according to the Standard & Poor’s/Case-Shiller index that tracks home prices in 20 major metropolitan areas. All 20 cities posted year-over-year gains for the second consecutive month, which hasn’t happened since 2005, before the crash.

In some of the hardest-hit markets, the gains have been particularly heady. Home prices rose 23% from one year ago in Phoenix and 18.9% in San Francisco. Nationally, the median home price in March stood at $184,300, well below the peak of $230,400 in 2006 but up from $154,600 in January 2012. (…)
For now, recent data suggest home-price gains are likely to continue. Sales of previously owned homes rose by 10.3% from one year ago in March, even as supplies of homes for sale fell by 16.8%. The Wall Street Journal’s quarterly survey of market conditions in 28 metropolitan areas showed very low supplies of homes available in a rising number of markets, including a less-than-three-month supply in a dozen markets, including the two hottest—Phoenix and San Francisco. (…)
At current mortgage rates near 3.5%, home values would need to rise by 32% nationally—and by as much as 48% in markets across the Midwest and north Florida—for affordability to return to its long-run average, according to an analysis by John Burns Real Estate Consulting in Irvine, Calif.

Krueger: Sequester Hits Harder, Earlier Than Expected

The economic fallout from deep federal government spending cuts has come sooner than expected, White House chief economist Alan Krueger said Tuesday.

ADP Says U.S. Companies Employed Fewer Workers Than Forecast

Companies added 119,000 workers to payrolls in April, figures from Roseland, New Jersey-based ADP Research Institute showed today.

China Manufacturing Weakens

A gauge of China’s manufacturing activity showed fresh signs of weakness in April, undercutting hopes of a stronger upturn in demand from the world’s second-largest economy.

The official Purchasing Managers’ Index came in at 50.6 in April, below expectations of a reading in line with the 50.9 recorded in March.

Note that the seasonally adjusted (by ISI) number is 49.1 vs 49.6 in March.

All but one of the official PMI subindexes—with the exception of a steady measure of raw material stockpiles—were down in April from the previous month.

The official PMI sub-index for new orders fell to 51.7 in April from 52.3 in March while the measure of new export orders slid into contraction territory with a reading of 48.6 in April, compared with 50.9 in March.
The sub-index for purchasing prices of raw materials tumbled 10.5 percentage points to 40.1 percent, the first reading below 50 after the sub-index stayed above the demarcation level for seven consecutive months.
The sub-index for finished goods inventories moved down 2.5 percentage points from the previous month to 47.7 percent, while the sub-index for production shrank slightly by 0.1percentage points to 52.6 percent.
The CFLP data also showed that the employment sub-index for April declined 0.8 percentage points to 49.0 percent, indicating job cuts, while the sub-index for supplier delivery times fell slightly to 50.8 percent.

Eurozone retail sales continue to fall sharply in April

Markit’s retail PMI® data signalled little respite for the Eurozone’s retailers at the start of the second quarter. Sales fell on a monthly basis for a survey record eighteenth consecutive month, and the rate of
decline remained sharp despite easing slightly since March. Retailers subsequently cut more staff and lowered their purchasing activity.

Retail PMI data by country signalled steep falls in sales in both France and Italy, and an ongoing flat trend in Germany. The month-on-month rate of decline in France eased from March’s record pace, but remained severe.

(…) Retailers across the Eurozone continued to cut workforces in April, extending the current sequence of job shedding to over a year. Moreover,
the rate of decline was little-changed from March’s 43-month record. Retail employment rose in Germany for the thirty-fifth successive month, but at only a marginal rate, while job shedding at French and Italian retailers remained sharp in the context of historic survey data.

(…) retailers’ gross margins continued to fall sharply, and they cut the value of purchases for the twenty-first successive month. Subsequently, stocks of goods for resale declined for the eight consecutive month, the
second-longest sequence in the survey history.

Denmark Exhausts Stimulus Avenues as Housing Losses Persist

Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started.
“We’ve used whatever leeway there is,” Economy Minister Margrethe Vestager said in a telephone interview from Copenhagen late yesterday. “There’s no more space to stimulate the Danish economy.”

Seoul offers exporters $10bn of help

Companies dealing with sluggish global demand and weaker yen

South Korea exported goods and services worth $46.3bn in April, the government said on Wednesday. This was a 0.4 per cent year-on-year rise, but down by 2.4 per cent from March’s figure.

Seoul said it would seek to revive export growth by increasing from Won71tn ($64.5bn) to Won82.1tn the value of public loan programmes aimed at small and midsized exporters. (…)

However, he cautioned that Seoul would closely monitor the weakening Japanese yen, a source of growing concern for South Korean policy makers. This follows a warning last month from finance minister Hyun Oh-seok that the yen’s slide was already having an impact on the South Korean economy.
Despite a recent fall in the US dollar value of the South Korean won, it has strengthened by 21 per cent against the yen over the past seven months, as markets anticipate expansionary fiscal and monetary policy under Japan’s new government. (…)
On Monday, data showed that South Korea’s industrial production suffered a month-on-month fall of 2.6 per cent in March: the third successive decline.

Solid rises in output and new orders support continued expansion of Japanese manufacturing economy

The headline seasonally adjusted Markit/JMMA Purchasing Managers’ Index™ (PMI™) rose to 51.1 in April, up from March’s 50.4 and a 13-month high. The PMI has shown steady improvement since the start of 2013 and has posted readings above the 50.0 no-change mark in each of the past two survey periods.

April’s survey data indicated a further rise in manufacturing output. Growth was modest, but still the sharpest in over a year as a particularly strong performance from the investment goods category offset ongoing weakness in the consumer and intermediate sectors.

Similar market group trends were observed for new orders data, with investment goods producers supporting a solid increase in sales for the sector as a whole. There was evidence of improved domestic and overseas demand, with clients reportedly investing in plant equipment and raising inventory holdings. A depreciation of the yen helped to support a solid rise in new export sales.

SENTIMENT WATCH: BAD SURPRISES? SO WHAT!

The chart below shows the 26-week rolling correlation of the Economic Surprise Index and changes in the S&P 500. A declining line represents periods where economic data and the S&P are becoming less correlated, or even moving inversely to each other. The most recent correlation below -0.7 indicates that stocks and negative economic data are moving in almost perfectly opposite directions. (Bill Hester via John Hussman)

Slovenia Junks Its Bond Sale After Downgrade

Slovenia stunned investors when it halted a bond sale just before Moody’s downgraded the country’s debt to “junk.”

The government said it would proceed with the bond issue. However, Slovenia will likely see higher borrowing costs, some investors said. Now that its bonds are rated junk, they will be off limits to investors that buy only investment-grade debt. Slovenia’s 10-year bond yielded 5.847% on Tuesday, compared with 5.69% a day earlier. (…)
Moody’s said it was concerned about Slovenia’s undercapitalized banking sector and deteriorating government balance sheet.

Rift Emerges Over Saudi Oil Policy

A rare public dispute over oil policy in Saudi Arabia emerged as the kingdom’s oil minister and a senior member of its royal family disagreed over long-term production targets for the world’s largest crude exporter.

The Middle Eastern kingdom, which produces around 10% of the world’s oil, needs to increase its crude production capacity by a fifth to 15 million barrels a day by 2020 in order to meet rising domestic consumption and maintain its current export capacity, said Prince Turki al-Faisal, a former intelligence chief and ambassador for the kingdom. (…)
The comments from the prince, who has no formal government position, but is a prominent member of the kingdom’s royal family, were contradicted by Saudi Oil Minister, Ali al-Naimi. There is currently no need to increase crude production capacity beyond 12.5 million barrels a day, Mr. Naimi said.
Saudi Arabia currently produces around 9 million barrels a day of oil, leaving 3.5 million barrels a day as spare capacity. (…)
Prince Faisal’s comments also run counter to the official position of the state-controlled Saudi Arabian Oil Co., also known as Aramco. Aramco declined to comment Tuesday, but its top executive has previously ruled out increasing capacity to 15 million barrels a day despite acknowledging that domestic use of crude would rise and thus limit exports.
Aramco’s Chief Executive Khalid al-Falih ruled out increasing Saudi production capacity to 15 million barrels a day in 2011, despite acknowledging that domestic use of crude would rise and thus limit exports, because he said expansion plans in other producing countries such as Iraq and Brazil should be enough to satisfy world markets. (…)
Saudi Arabia last year consumed around 3 million barrels per day of oil, according to the U.S. Energy Information Administration, almost double its 2000 level and putting it on track to use more than 5 million barrels a day if a 7% annual growth rate were to continue.
Aramco’s Mr. al-Falih acknowledged in 2011 that, if left unchecked, domestic energy consumption would rise to 8.2 million barrels of oil a day by 2030. (…)

Remember: the Saudis need $100 oil to balance their budget.

NEW$ & VIEW$ (25 APRIL 2013)

Posted on April 25, 2013 by Denis Ouellet

SOFT PATCH WATCH

Spring Slowdown Hits Factories No matter how you slice it, the durable goods report was miserable.

New orders for all durable goods plunged 5.7% in March, about double the 2.9% drop expected. Falling demand for aircraft and defense goods contributed much of the weakness, but not all of it. Of the major categories, only computer makers reported an increase in new orders.

For the first quarter, new orders and the backlog of unfilled demand were pretty much flat compared to year-earlier levels. Shipments held up. But orders are the lifeblood for future production. Unless order books fatten up, gains in production and shipments will slow soon.
Businesses have joined consumers in the spring siesta. New orders for core capital goods — which excludes aircraft and defense equipment — edged up 0.2% in March, but are no higher than they were a year ago.

How miserable? NBF Economics explains:

To say that US durable goods orders were weak in March is an understatement. The 5.7% drop is the worst monthly performance since last August. And with orders being outpaced once again by shipments, unfilled orders fell. That extended the declining trend in the year-on-year growth rate of unfilled orders.

As today’s Hot Charts show, such a decline is typically associated with soft patches, if not recessions. Note the year-on-year contraction in unfilled orders for non-defense capital goods excluding aircrafts, a proxy for business investment spending.

The uncertainty brought by the fiscal cliff and subsequently by the sequester are possible explanations for this atypical drop. That already
seems to be capping employment growth in the manufacturing sector and if orders continue to disappoint, things could get worse on that front.

Weaker PMI data hit markets on global growth worries

Weaker than expected flash PMI surveys from Markit for China, the US and the euro area have increased worries about the global economy.

(…) the fact that the weakness of the China PMI was driven by slower new order growth, reflecting a renewed decline in new export work, led to growing fears about global demand (…).

The downbeat news was followed by some brighter news as an upturn in the Markit flash PMI for France indicated a marked easing in the pace of economic contraction for April. The manufacturing PMI came in broadly as forecast (44.4 against a consensus of 44.1), but the service sector PMI jumped to 44.1 against a consensus of 42.0. However, the rally was short-lived, as German flash PMI data fell well short of expectations. The manufacturing PMI for Germany slipped to 47.9 (consensus: 49.0), while activity in the service sector contracted slightly with the respective index down to 49.2 and confounding expectations of a rise to 51.0.

U.K. Economy Avoids Further Contraction

In its preliminary estimate, the Office for National Statistics said gross domestic product grew 0.3% in the first three months of the year compared with the fourth quarter. Economic output was 0.6% higher compared with the first quarter of 2012.

But: Retailers gloomiest for 15 months in April

UK retailers reported a drop in sales on average for the first time in eight months in April, and the outlook for sales in the coming month darkened to the gloomiest for 15 months, according to the CBI.

Letta calls for easing of austerity policies

Italian bond yields close to recent record lows

“Europe’s policy of austerity is no longer sufficient,” he said, echoing similar remarks this week by Jose Manuel Barroso, European Commission president.

Italy Led by Letta Brings Berlusconi Back as Winner

Silvio Berlusconi, the three-time prime minister and two-time convicted lawbreaker, won a path back to power in Italy by outmaneuvering rivals during an eight- week political stalemate.

Spanish unemployment tops 6m

Record figure piles pressure on Madrid to ease austerity

Almost 240,000 people lost their jobs in the first three months of the year, according to Spain’s national statistics office, taking the overall number of jobless to 6.2m. The unemployment rate rose by more than 1 point to 27.16 per cent – worse than predicted by most economic forecasters.
The statistics office also revealed that almost 2m out of 17.4m Spanish households are now without a single person holding a job. (…)
The drop in employment in the first quarter was broadly similar to the falls seen in the past three quarters, and higher than in the corresponding period last year.
Job losses were particularly heavy in the services sector, but also in industry and farming. Employment dropped further in the construction sector, which has already shed more than 1.6m jobs since 2008 as a result of the bursting of Spain’s housing bubble. (Chart from El Pais via Ft Alphaville)

South Korea growth at two-year high

First-quarter GDP of 0.9% boosted by export recovery

Why Housing Won’t Save the U.S. Economy

In a new essay, University of Chicago’s Amir Sufi says we should “temper our optimism on what a housing recovery can do for the U.S. economy.”

(…) The crux of his argument is that a key way that housing stimulates growth — the so-called “wealth effect” in which people spend more because they feel richer as the value of their home increases — is likely to be muted because many of the borrowers who spent most liberally during the housing boom aren’t getting mortgages today. (…)
Mr. Sufi has done research suggesting that homeowners borrowed about $1.25 trillion out of their homes from 2002 to 2006. He finds that this spending wasn’t uniform. Homeowners with the lowest credit scores were very aggressive, he says, borrowing $0.40 against every dollar of increased housing equity, while those with the best credit “were almost completely passive,” pulling almost no equity out of their homes when house prices increased.
The inverse was true when households cut back on spending after the bust. Borrowers with weaker credit were more constrained and cut back much more dramatically on spending. (…)
“The only people getting mortgages at this point are those with pristine credit histories, which are exactly the group least likely to consume out of their housing wealth,” says Mr. Sufi. (…)

EARNINGS WATCH

Mediocre Earnings and Revenues

Below is an updated look at the earnings and revenue beat rates for stocks that have reported so far this earnings season. Last Friday we noted that the earnings beat rate stood at 58%, while the revenue beat rate was much lower at 43.9%. Another 250 companies have already reported this week, which is more than double the amount that had reported all season from April 8th through April 19th. As shown below, the earnings beat rate has taken a hit with this week’s reports added into the mix. As it stands now, 56.9% of the 458 US companies that have reported have beaten earnings estimates. This would be the lowest reading seen since the bull market began, so the remaining companies that still have to report have some work to do!

NEW$ & VIEW$ (22 APRIL 2013)

Posted on April 22, 2013 by Denis Ouellet

Finally home…but still mourning my laptop. Please bear with me.

SOFT PATCH WATCH

Some clouds are gathering over the U.S. economy. Yesterday’s Fed Beige book confirmed that several districts reported weakness in defense-related sectors, with furloughs, layoffs, and even plant closures in anticipation of the sequester. The concern, of course, is
that such layoffs and moderation in production could spill over to the rest of the economy.

The Philadelphia Fed’s indices of manufacturing activity added to those concerns. True, the Philly’s shipments sub-index rose to a four-month high in April, but those shipments likely came from inventories rather than production. The inventory sub-index, indeed, slumped to -22.

As today’s Hot Charts show, outside of a recession, that’s the worst
inventory sub-index in more than twenty years. Businesses may be reluctant to expand output in light of the uncertainties brought by the sequester, and choosing instead to run down inventories. So, we may be heading for some destocking in Q2.

The moderation in production likely explains the string of elevated initial jobless claims that we’ve had in recent weeks. We’ll wait for more data to confirm whether this is a temporary softening or rather
the start of a concerning trend, but the data so far seems to support our call for a sharp deceleration in US GDP growth in the second quarter to around 1% annualized after a strong Q1.

SURPRISES

Economic data globally has disappointed

Abenomics Wins Crucial Global Backing Shinzo Abe’s program to jump-start Japan’s economy won crucial backing from global policy makers, who welcomed his government into pan-Pacific free-trade talks, and expressed tolerance of the weakening of the yen.

Italian Orders Erode Along With Governmental Prospects

Industrial orders in Italy fell by 2.5% in February adding to a string of declines that extends back over four months. The declines over the recent two months are steeper than the declines over the previous two months.
Foreign orders have fallen in three of the last four months and are down by a sharp 2.6% in February alone. Domestic orders have fallen in three of the last four months and in five of the last six months.

This is really ugly: orders from Dec. to Feb: –0.7%, –1.4%, –2.5%.

Barroso: Austerity No Longer the Answer

The European Union’s chief bureaucrat said the bloc should place a greater emphasis on policies that stimulate growth in the short term, and less on cutting government spending.
In a speech Monday, European Commission President José Manuel Barroso said the policy of austerity pursued by the EU in recent years no longer has the political and social support needed to work. (…)
Mr. Barroso hinted that some countries could be given longer to get their budget deficit in line with EU rules which limit it to 3% of gross domestic product.
“Even if the policy of correcting deficit is fundamentally correct, we can always discuss fine-tuning of pace,” he said.

Spain to Emphasize Growth More

“What we are going to do now is strike a better balance between deficit reduction and economic growth,” Mr. de Guindos said. (…)
Mr. de Guindos said the government expects Spanish GDP to shrink between 1% and 1.5% this year and then post “slight” growth next year.

Luxury Car Makers See Slower China Sales

BMW expects slower sales growth in China this year, as premium-car makers grapple with a slowdown in economic growth and intensifying competition in one of their most lucrative markets.

The German auto maker said at the Shanghai auto show over the weekend that it expects China sales growth in the upper single digits. BMW’s sales in China increased about 40% last year to roughly 326,000 vehicles. (…)
Analysts say factors specific to BMW are also behind its modest growth projections.

Euro Hits Hermès Sales Growth

In Asia—which makes up around 50% of revenue—sales rose 9.3% to €402.3 million, as the euro’s rapid rise made a significant impact on growth. At constant currencies, revenue in the region increased 14% on year as business cooled from 24% in the previous quarter.
The region showed contrasting trends as sales in the Asia, excluding Japan, increased 18% including currency effects.
Revenue in Japan came in down 8% over the period compared with a year earlier—hit by currency variations. Stripping out the effect of exchange rates sales in the country rose by 7%.
Business in Europe, which has benefited in recent times from purchases by Asian tourists, registered a 12% rise over the period at current exchange rates, while sales in the Americas region jumped 10%.

EARNINGS WATCH

Strategas Research Partners report that the negative-to-positive preannouncement ratio for the S&P 500 stands at 4.65, the highest level since 2001. The market has held up well through these negative preannouncements, and the average gain for the month following the end of the quarter when the ratio is above 2.1 has been 2.0%; while when the ratio has been below that, the average performance has been a loss of 0.1%. Lowered expectations often help to facilitate upside surprises and earnings season could be the market driver over the next several weeks.

Caterpillar Cuts View

Caterpillar’s first-quarter profit fell 45% amid a broad-based revenue decline as the maker of construction and mining equipment was hurt by falling demand for its mining equipment.

For the year, the bellwether machinery maker now expects per-share earnings of $7 on revenue of between $57 billion and $61 billion, from its previous estimate for $7 to $9 and $60 billion to $68 billion.
“Caterpillar and our dealers usually add inventory in the first quarter to prepare for higher end-user demand in the spring and summer,” Chairman and Chief Executive Doug Oberhelman said. “In the first quarter of 2012, we added about $2 billion to inventory, but this year, we cut inventory by about a half billion dollars.”

SENTIMENT WATCH

Wolfgang Schaeuble in Washington: You Don’t Get Europe

(…) Italy has a big economy and the Italians will sort it out, he said.

“The Italians are flexible,” said Mr. Schaeuble. “They are more flexible than the Germans.”
Indeed, Germany’s lack of flexibility on deficit-cutting — even as some euro zone countries, like Italy, are saving their way into prolonged recession — has been a point of contention throughout the crisis and was a hot topic at the meeting of the Group of 20 finance ministers and central bank governors this week.
The Germans are under pressure to ease off a bit, to use the current period of relative calm in financial markets to allow euro zone members to slow the pace of deficit-cutting in order to allow their economies some breathing room. It’s not that simple, said Mr. Schaeuble.
Americans need to lower their expectations. Europe is growing old, Germany’s population is declining. That will have an impact on Europe’s ability to achieve strong economic growth.
“No one should think that Europe will deliver high growth rates in the coming years,” he said.
Ok, but what about France? asked Richard Burt, a former U.S. ambassador to Germany. “Does France have the political and economic strength to continue to be a strong partner for Germany?” (…)
“As a member of the German government I am condemned to work closely with France,” he said, as the entire room erupted in laughter. “That’s Europe.”
The next step in resolving the euro zone debt crisis may be the most complicated yet. With 27 member states, the European Union has 27 national banking supervisors and no clear way to prevent a banking crisis in one country from spilling over into the rest of Europe. That’s why tiny Cyprus, for example, recently became a huge problem for the rest of Europe.
The lesson of Cyprus, Mr. Schaeuble explained, is that Europe, unlike much of the rest of the world, is dead serious about making it impossible for a banking crisis to ignite a sovereign debt crisis in the future. No bank should be too big to fail. Saving Cyprus introduced the notion of a bail-in and, said Mr. Schaeuble, establishes a clear “hierarchy of liability” that in future will shield taxpayers from bailing out moribund banks. First, the shareholders will be hit, then the bond holders, then the depositors. Only after these lines of defense collapse should taxpayers be made to foot the bill for financial risk gone sour.
“That’s the hierarchy of liability and it’s ok,” said Mr. Schaeuble.
To get there, though, Europe needs to create a banking union, a single supervisory mechanism to oversee the industry and equipped with the power to wind down a failed bank. This next step is one of the cornerstones of what the Germans like to call the future architecture of the euro zone. (…)
“Europe remains a very complicated place,” he said. “If you try to explain to an American political leader how it works they will never understand.”

NEW$ & VIEW$ (13 MARCH 2013)

Posted on March 13, 2013 by Denis Ouellet

Long workweek points to stronger employment. Eurozone IP drops some more. Japanese corporate reflation. UK stagflation. Germany vs France. China fighting housing, inflation. Canadian indebtedness. OPEC Acknowledges U.S. Oil Threat. Sentiment watch: tired bears.

Workweek Tying Longest Since WWII Spurs Hiring at U.S. Factories

Production workers averaged 41.9 hours a week in February, Labor Department data showed last week. That tied December 1997 and January 1998 as the most since May 1944, when full wartime production was pulling more women into factories, as symbolized by the Rosie the Riveter character in posters, song and film. The record was 45.4 hours in January and February 1944. (…)

Supporting the notion, the Labor Department yesterday said employers in January fired the fewest workers since it started tracking the data 12 years ago, while job openings rebounded.

(…) wages as a percentage of GDP are near a record low, Labor Department data show. From the early 1950s until 1975, wages were at least 50 percent of GDP. They hit a record low of 43.6 percent in last year’s third quarter and ended the year at 43.9 percent.

Euro-Area Industrial Output Falls More Than Forecast

Factory production in the 17-nation euro zone dropped 0.4 percent from December, when it rose a revised 0.9 percent, the European Union’s statistics office in Luxembourg said today. Production fell 1.3 percent in January from a year earlier.

Industrial output in Germany, Europe’s largest economy, slipped 0.4 percent in January after a 0.8 percent gain in December, today’s report showed. France reported a decline of 1.2 percent, while Spanish output rose 0.6 percent.

Toyota agrees biggest bonus in five years Japanese companies under pressure to pay workers more

(…) Other Japanese companies have also increased bonuses or wages in response to calls from the prime minister, Shinzo Abe, that companies push up wages alongside government measures aimed at banishing deflation in Japan. (…)
As wage negotiations have gathered pace ahead of the fiscal year-end, the Abe government has been increasing the pressure on companies to lift incomes, concerned the Japanese public could be left worse off if prices rise but wages do not.
The weaker yen, which has been declining as a result of growing confidence in a US economic recovery coupled with Mr Abe’s deflation-fighting policies, has lifted profits at exporters such as Toyota.
However, it has also pushed up import prices, making key commodities from flour to petrol more expensive for consumers. (…)
Retailers hope that rising wages will stimulate consumption, which accounts for about 60 per cent of Japan’s gross domestic product.(…)

Spectre of stagflation haunts UK

Sterling falls to lowest level against dollar since June 2010

Inflation expectations, as measured by the difference between nominal and inflation-linked bond yields, ticked up to near 3.3 per cent on Tuesday, levels not seen since September 2008.

Bundesbank warns Paris on deficit target

German criticism comes as Schäuble prepares balanced budget

(…) The French president said the budget deficit, which he had previously pledged to reduce to 3 per cent of gross domestic product in line with EU commitments, would “probably stand at 3.7 per cent in 2013 even though we will try to make it lower”. (…)
Mr Weidmann said: “One can always discuss the details – structural consolidation versus nominal targets – but at the end of the day, nominal targets are a lot more visible and if the impression were to be created that these rules were being treated very laxly the first time they are implemented, that would be a bad signal for the whole currency union.”

CHINA

Monetary measures to cool home prices to continue Monetary policies to cool home prices in China will continue or even strengthen in the future, said the country’s central bank governor Zhou Xiaochuan at a press conference on Wednesday.

China should remain on high alert for inflation China’s central bank governor Zhou Xiaochuan said Wednesday that China should remain on high alert for inflation and the bank will take measures to stabilize prices.

CANADIAN INDEBTEDNESS

NBF Financial

OPEC Acknowledges U.S. Oil Threat

The Wall Street Journal’s Sarah Kent explains that, having initially played down the threat from U.S. production growth, OPEC now expects increases in supply from countries not in the cartel to grow by more than 1 million barrels a day.
This could be the start of a quantum shift in oil-market dynamics. A study from the International Energy Agency last year predicted that by 2020, U.S. oil production will outstrip that of OPEC’s de facto leader, Saudi Arabia.

SENTIMENT WATCH

Tired bears…

“Almost every one I talk to is now bullish,” observed long-term bear David Rosenberg, the chief economist at Gluskin Sheff + Associates Inc., in a note to clients earlier this year.
Richard Russell Says Buy Dow Industrials ETF

Richard Russell raised eyebrows Tuesday when a report surfaced the noted Dow Theorist is telling newsletter clients to buy SPDR Dow Jones Industrial Average ETF (NYSE Arca: DIA) in an apparent reversal of his bearish stance.
“Yes, I know that this market is uncorrected during its long rise from the 2009 low, and I know that there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth, but my suggestion is that my subscribers should take a chance … and take a position in the DIAs,” Russell said, according to a King World News report. (…)
“By taking a position in the market, you’ll be casting yourself on the side of the optimists, and you’ll also be casting your vote on the side of Ben Bernanke and the Feds,” Russell said. “Besides, it’s fun to be able, for once, to place yourself on the cheerleaders side of the US markets, and it makes sense to be on the side of America’s Federal Reserve.”
The buy recommendation drew attention because in a separate King World News report last week Russell said he didn’t trust the rally as the Dow reached all-time highs.[Dow Industrials, Transports ETFs Hit Records]
“My explanation of this unprecedented situation is that the advance to new highs was a direct result of never-before-seen manipulation by the Federal Reserve,” he said in the earlier report. “But I doubt if the Fed will be able to engineer a coming new era of prosperity in America. Thus, it will be an example of where the stock market will not be predicting the nation’s economic future.”

What a difference a week makes! One week you don’t trust the manipulative Fed, the next week, “it makes sense” to be sleeping with the Fed.

John Hussman is also wavering:

(…) There are certainly aspects of the most recent market cycle that our present methods would have handled differently. One variation (resulting from the ensemble methods we introduced) is to demand a broader set of positive divergences in what we define as “early improvement in market action” – which would move the associated constructive shift to early 2009 when the S&P 500 was down 50%, rather than October 2008 when it was down 40%. (…)

I am not encouraging investors to deviate at all from their own investment discipline, provided that it is well-defined, well-tested, and matches their risk tolerance over the complete market cycle. But investors who have no such discipline – who believe that it is possible to simply “hold stocks until they turn down” or “party until the Fed takes away the punch bowl” – these investors are likely to be confounded by the failure of these simplistic notions to provide the comfortable exit they unanimously envision.

Today is not 2003, and it is not 2009. The closer analogs (partially, but not solely on the basis of the recent overvalued, overbought, overbullish, rising-yield syndrome) are 2007, 2000, 1987, and 1972, not to mention 2011 – before a near-20% swoon – and 1929, at least on a valuation and technical basis.

For the record, the Rule of 20 was clearly in “extreme risk” territory in 1972, 1987, 2000, 2007, …even in 1929.

Chart of the Day

The current Dow rally has followed the post dot-com bust rally of the Nasdaq that began back in 2002 fairly closely and held to a general post-massive bear market rally pattern — rally during the first 300 trading days, trade in a relatively flat choppy manner up until around 600 trading days and then re-embark on the second leg of the rally. History may not repeat, but it rhymes.

Morgan Stanley: The US Economy Is On The Verge Of A Major ‘Inflection Point’

In a new note, Morgan Stanley’s Vincent Reinhart talks about the coming inflection point for the US economy, and he also talks about the change coming in the second half of the year.

In the Morgan Stanley forecast for the US, the trajectory of economic activity marks an inflection point midway through 2013. The severe financial crisis of 2008-09 necessitated significant downward adjustments by the private sector to the levels of aggregate demand and efficient supply. As the event recedes further into history, however, the drag on growth from these ongoing level adjustments plays out.
In our forecast, the expansion of real GDP steps up to around 2-3/4 percent in the second half of this year and beyond. Indeed, the resilience of the private sector in our market economy probably would have been more evident by now had not Washington politics intruded.

NEW$ & VIEW$ (11 MARCH 2013)

Posted on March 11, 2013 by Denis Ouellet

U.S. employment growth accelerates. Canadian employment surges. Mexican stimulus. Brazil inflation problem. China economy slowing, inflation rising. Japan machinery orders slump. French IP slumps. Sentiment watch. U.S. foreign profits.

Employers Ignore Economic Clouds

Employers stepped on the accelerator last month, hiring briskly enough to bolster the recovery but likely not enough to prompt the Federal Reserve to turn off its easy-money spigot.

The U.S. added 236,000 jobs in February, notching gains in almost every corner of the private sector. February’s gains were well above the 195,000-job-a-month average of the previous three months and pushed the jobless rate to a four-year-low of 7.7%.
“The overall 236,000 number is nice, but the breadth of jobs growth across industries tells me that the recovery is broadening and likely gaining momentum,” said Mark Vitner, senior economist at Wells Fargo Securities LLC. “The mix of jobs is also changing. We’re creating higher-paying ones.” (…)
The ranks of temporary workers, often seen as a hiring bellwether, surged by 16,000 after declining by 3,000 in January.

Other details:

The net revisions to January and December was -15,000.
Wage and salary income growth in February looks to be very solid combining the 0.5% increase in hours worked with the 0.2% increase in average hourly earnings.
If the participation rate holds at 63.5% and employment growth averages +200,000/mo, then we won’t hit a 6.5% unemployment rate until October 2014 …
Government payrolls fell by 10,000 in February, the fifth straight month of declines. The total number of government jobs in the U.S. — about 21.8 million at the local, state and federal level — is now the lowest since October 2005.

(Charts from Markit)

Stronger labour market provides some offset to tax hikes

(…) the goods sector, whose share of private sector payrolls hit a historic low last October, is now bouncing back sharply thanks to strong job gains in cyclical sectors like construction and manufacturing. With housing on the rise and factories benefiting from enhanced competitiveness (e.g. low
energy costs and a competitive US dollar), those favourable employment trends could persist and offset the expected sequester-related job cuts in government.

The labour market’s acceleration comes at a good time for consumers who have had to deal with the twin blow of tax hikes at the start of the year and gasoline price increases. So, consumption spending should find some support in Q1 despite the headwinds. With February’s data, wage growth is tracking +4.3% annualized so far in Q1, while aggregate hours are tracking +2.3%, both consistent with a pick up in GDP growth in the first quarter after a weak end of 2012. (National Bank Financial)

Obamacare Effect? (Mish Shedlock via Doug Short’s blog)

Obamacare is in play. Recall that under Obamacare, the definition of full-time employment is 30 hours. The BLS cutoff is 34 hours. At 30 hours, companies have to pay medical benefits so they have been slashing the number of hours people work. This reduced the number of hours people worked and provided an incentive for many to take on an extra job.
We can see the effect in actual BLS data.

Multiple Jobholders

In the past month there was a surge of 679,000 in the number of people working multiple jobs. The seasonally-adjusted increase, as shown above, was 340,000.

McDonald’s Posts Lackluster Sales

Factoring out the calendar impact, McDonald’s said its global same-store sales were up 1.7% last month. McDonald’s same-store sales in the U.S. fell 3.3% in February, but came in flat excluding calendar effects.
McDonald’s Asia/Pacific, Middle East and Africa region posted 1.6% lower same-store sales as positive results in China and Australia were offset by Japan. They were up 1.5% excluding the calendar shift.
In Europe, same-store sales were down 0.5%. Excluding the calendar impact, the metric was up 2.7%, led by performance in the U.K. and Russia.

Canadian employment in February blows past best forecasts

Defying even the most optimistic of forecasts, the economy created 50,700 jobs in February, marking employment gains in six of the past seven months.
Most of Canada’s gains were on the services side of the economy, specifically in professional jobs, such as computer system design and management services, along with food services and public administration.
The goods side fared less well, with factories shedding more than 25,000 jobs last month, bringing employment to below last year’s levels. And – in a sign of a recent challenges in the sector – natural resources lost 6,000 positions.

Mexico’s Central Bank Slashes Rates, Ending Years of Inaction Mexico’s central bank slashed interest rates Friday, ending almost four years of inaction with a move intended to support sluggish economic growth in Latin America’s second-largest economy.

(…) the central bank cut the overnight lending rate by a half-percentage point to 4%, its first shift in the rate since July 2009. The bank made it clear it was a one-time cut and not the start of an easing cycle. (…)
The Mexican economy is closely linked to the U.S., sending almost 80% of exports north of the border. In 2009, when the U.S. economy shrank 3%, Mexico’s gross domestic product plummeted 6%.

Brazil’s February Consumer Prices Rise Faster Than Forecast

Prices as measured by the IPCA price index rose 0.60 percent in February, the national statistics agency said. That was down from the 0.86 jump posted in January. Annual inflation accelerated for the eighth straight month to 6.31 percent from 6.15 percent the month before.
With inflation running faster than in Mexico, Colombia or Chile and approaching the 6.5 percent upper limit of the central bank’s target range, the monetary policy committee unanimously decided to hold the benchmark rate at a record low for the third straight meeting on March 6.

Surprised smile “Approaching the 6.5% upper limit”? Annualized inflation was 9.0% in the last 2 months!

CHINA SLOWING

China released its monthly stats on Saturday, combining January with February to mitigate the impact of the Lunar Year holidays:

China’s Retail-Industrial Data Signal Moderating Rebound

Retail sales were up 12.3% on-year in January and February, compared with a 15.2% rise in December.

The gain in retail sales was below the lowest economist projection of 13.8 percent and was the smallest for a January- February period since a 10.5 percent pace in 2004.

Pointing up Revenue of large catering firms, which includes higher-end restaurants, declined 3.3% YoY during the first two months.

Likely the consequence of the new leaders’ crack down on extravagance.

Electricity output, which is closely watched in China because of concerns about the quality of other data, was up 3.4% in the same period compared with growth of between 6% and 8% in the final months of last year.
Fixed-asset investment rose 21.2% Y/Y in January and February, compared with a 20.6% rise in the whole of 2012.
Industrial production grew 9.9% Y/Y in January and February, after a 10.3% gain in December.
Residential floor space sold jumped 55% off a weak base.

Remember last week’s release of 20%+ growth in exports?

Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong, said the industrial-production data suggest that recent export numbers were exaggerated. “In view of the strong export figures in the last two months, such IP growth should have been higher than currently reported,” Qiao said in an e-mail.

China Passenger-Vehicle Sales Top Estimates China’s passenger-vehicle market had its strongest start since 2010, indicating auto demand is thriving relative to other industries at a time when broader indicators are slowing in the world’s second-largest economy.

Wholesale deliveries of cars, multipurpose and sport- utility vehicles, rose 20 percent to 2.84 million units in January and February, from 2.37 million units a year ago, according to the China Association of Automobile Manufacturers.
Total sales of vehicles, including buses and trucks, rose 15 percent to 3.39 million units during the first two months, the association said.

China Inflation Climbs

China’s policy makers are grappling with an uptick in inflation just as industrial output and retail sales seem to be softening. Compounding the government’s challenges are soaring property sales.

China’s consumer inflation jumped to 3.2% year-on-year in February, up from 2% in January, for the highest increase since April last year. Prices were likely boosted by the Lunar New Year holiday, which often brings a spike in prices for food and other goods.

CPI-food rose 6% and non-food prices rose 1.9%. On a M/M basis, CPI rose 1.1% in February after 1% in January. Food prices were up 2.7% last month while non-food prices rose by only 0.2%.

Japan Machinery Orders Drop Sharply

Japanese core machinery orders fell 13.1% in January from the previous month, the government said Monday, the first decline in four months, as Japan’s economic recovery has yet to gain momentum amid a recession in Europe and slower growth in China. (…)
Unadjusted core orders fell 9.7% from the same month a year earlier.

French Industrial Output Tumbles as Recession Looms French industrial production fell more than expected in January as Europe’s second-largest economy teetered on the brink of its third recession in four years.

Output from factories, mines and utilities fell 1.2 percent in the month from December, national statistics office Insee said today. Factory output fell 1.4 percent in January and 4.6 percent in the three months through January, led by a slump in car production.

Italy Downgraded by Fitch Fitch downgraded Italy’s credit ratings, citing inconclusive elections results and a deeper recession, and gave a negative outlook.

The firm lowered Italy’s issuer-default ratings to triple-B-plus, or three steps above junk territory, from A-minus. The outlook is negative. (…)
Fitch also noted that the latest data showed the continuing recession in Italy is one of the deepest in Europe, while the unexpected fall in employment and persistently weak sentiment indicators increase the risk of a more protracted and deeper recession than previously expected.

One in four Germans would back anti-euro party

(…) the poll conducted by TNS-Emnid for the weekly Focus magazine showed 26 percent of Germans would consider backing a party that wanted to take Germany out of the euro and as many as four in 10 Germans in the 40-49 age bracket would do so. (…)

A new eurosceptic movement called ‘Alternative for Germany’ (AfD) comprising mostly academics and business people is due to hold its first meeting later on Monday in a northern suburb of Frankfurt.

SENTIMENT WATCH

Dow Surges to Record Highs, Finishes Up 2.2% Investors shed fears, pushing stocks up to their fourth all-time record high in five days. Banks get a clean bill of health
It’s Not Just the Fed The market has more going for it than easy monetary policy. If the Fed starts to tighten, stocks could fare surprisingly well.
Funds flow:

Investors continued to focus on adding equity exposure to their portfolios. Overall, stock mutual funds and ETFs reported net inflows of $5.7 billion for the week. It was the strongest week for equity products in the last four as both mutual fund (+$3.2 billion) and ETF (+$2.5 billion) investors showed confidence in a continued upward trend for stocks. It marked the ninth consecutive week of inflows for equity mutual funds, bringing their year-to-date total to an impressive $59 billion. Domestic equity funds contributed $22.2 billion of that total, while nondomestic equity mutual funds saw $27.4 billion of net inflows for the year so far. Net flows YTD for emerging markets products were almost flat, and net redemptions for ETFs (-$1.023 billion) nearly wiped out all of the net inflows for their mutual fund brethren (+$1.026 billion). (Lipper via Barron’s)

The Odds Favor the Bulls Chances are good that the Dow Jones Industrial Average will finish the year above 15,000—and the odds are 50-50 it could approach 18,000 by the end of 2014.

(…) Even with the Dow reaching a nominal record of 14,329 last Thursday, the performance of the market over the past five years is still below par. That bodes well for the bulls. Lower-than-average returns over five years are generally followed by higher-than-average returns over the following two years.

Accordingly, the Dow has four chances in five that it will be flat or higher by year-end 2014, and a 50-50 chance of approaching 18,000 over the same time frame.

(…) these market odds are derived from long-term market patterns whose source is University of Pennsylvania’s Wharton School finance professor Jeremy Siegel, author of the aptly titled best seller, Stocks for the Long Run.

Professor Siegel has amassed numbers on stock-market performance dating back to 1871, the earliest year for which unimpeachable data are available. The numbers, compiled with the help of one of Siegel’s former students, Jeremy Schwartz, provide the basis for projecting the likely path of the Dow. (Schwartz is research director of the New York-based WisdomTree Asset Management, a firm with which Siegel is associated.) (…)
Last year, the five-year returns were in the lowest quartile of all returns for five-year cycles. This year, the five-year returns through March 5 were in the lowest third of all returns for five-year cycles. Schwartz found 45 five-year periods in the lowest third. The median annual return on these 45 two-year periods was 14.59%. Median annual return on all two-year periods was 9.62%.

To apply that 14.59% to the Dow, we first subtract 2.48 percentage points for dividends, leaving a median price return of 12.11% a year. Grow the Dow at 12.11% from the March 5 close of 14,254—the final number in our last five-year interval—and you get 17,915 within two years.

Schwartz also found that of these 45 two-year periods, in 38 cases the market was either flat or higher over the next two years. How high? The strongest annual rebound post-World War II was 32% in the two years ended in 1976. Grow the Dow 29.5%—again, subtracting 2.48 percentage points for dividends—and you get 23,904.

There you go!. Oh!, don’t forget that markets rise about 65% of the time…

Gross Raises U.S. Economic Growth Forecast to 3% in 2013

Gross, co-chief investment officer of Pimco, doubled his forecast for growth in U.S. gross domestic product to 3 percent for this year, up from the firm’s December forecast of 1.25 percent to 1.75 percent in 2013.

Bank of America Raises Forecast for Gain in Home Prices

U.S. home prices probably will rise 8 percent this year, up from a previous estimate of a 4.7 percent increase, according to Bank of America Corp.

“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said in the report, dated yesterday. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”

Room To Run (Palos Management Inc.)

(…) There are many factors, both technical and fundamental, that will continue to drive stocks higher. JPMorgan notes that the average mutual fund is trailing its benchmark by about 100 bps so far this year. Speculation is that these managers are using market dips to get invested. Factor in some “asset rotation” into equities and the favorable technical backdrop for equities becomes clear.

More importantly, however, are fundamentals. Announced stock buybacks in the US are currently at a “buyback yield” of 8% (annualized announced buybacks over aggregate market cap). Historically, in the US, 95% of announced buybacks are executed. Companies are also returning cash via dividends. The dividend yield of the top 20% of the S&P 500 is 4.2% compared to a 3.5% yield for investment grade bonds. This spread of 123 bps is the largest it has been since 2009. Valuations and earnings tell a similar story. TEV / EBITDA multiples are currently at 9x versus 11x before the financial crisis and consensus estimates for the S&P 500 are for 10%+ growth in 2013 and 2014.

More U.S. Profits Parked Abroad

U.S. companies are keeping more of their profits offshore, a Journal analysis of 60 big companies found. The moves shielded more than 40% of the companies’ annual profits from U.S. taxes.

A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S. (…)
Overseas balances have grown in part because U.S. multinational companies are paying less tax on their overseas operations. Offshore subsidiaries of U.S. companies paid an average 14% tax rate in 2008, according to the most recent statistics from the Internal Revenue Service, down from 16% in 2004.
Corporate filings offer a glimpse of the low rates companies pay outside the U.S. Apple said it held $40.4 billion in untaxed earnings outside the U.S. as of Sept. 29, 2012. Apple estimated that it would owe $13.8 billion in tax if it brought that money back to the U.S. That is a 34% tax rate, just shy of the federal 35% rate. Since foreign income taxes are creditable on U.S. taxes, that means Apple has paid less than 5% tax on those earnings to date, says Ms. Blouin, the Wharton professor.

Indonesian growth slips to two-year low Domestic consumption helps keep growth above 6%

It seems that U.S. housing is the only area offering fresh positive stuff these days. That is if you are not in the market for a new house.

Companies dealing with sluggish global demand and weaker yen

Italian bond yields close to recent record lows

Record figure piles pressure on Madrid to ease austerity

First-quarter GDP of 0.9% boosted by export recovery

EARNINGS WATCH

Sterling falls to lowest level against dollar since June 2010

German criticism comes as Schäuble prepares balanced budget

CHINA

Monetary measures to cool home prices to continue Monetary policies to cool home prices in China will continue or even strengthen in the future, said the country’s central bank governor Zhou Xiaochuan at a press conference on Wednesday.

Dow Surges to Record Highs, Finishes Up 2.2% Investors shed fears, pushing stocks up to their fourth all-time record high in five days. Banks get a clean bill of health

It’s Not Just the Fed The market has more going for it than easy monetary policy. If the Fed starts to tighten, stocks could fare surprisingly well.

Funds flow:

The Odds Favor the Bulls Chances are good that the Dow Jones Industrial Average will finish the year above 15,000—and the odds are 50-50 it could approach 18,000 by the end of 2014.

Room To Run (Palos Management Inc.)