NEW$ & VIEW$ (15 NOVEMBER 2013)

Empire State Manufacturing Contracts: General Business Conditions Lowest Since January

The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3.



Shoppers Can’t Shake the Blues


Wal-Mart Stores Inc. offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

The downbeat outlook from the world’s largest retailer was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend, putting a further drag on an already sluggish economy.

Kohl’s Corp., a department-store chain that caters to middle-income customers, also reported weak results Thursday and said it scaled back its inventories ahead of the holidays, signaling a lack of confidence in its ability to boost sales. (…)

Wal-Mart lowered its full-year profit forecast on Thursday and warned sales would be flat through the end of January, after sales fell for a third straight quarter at U.S. stores open at least a year. (…)

Even higher-end retailers experienced softness in the third quarter. Nordstrom Inc. reported late Thursday that its profit fell to $137 million from $146 million a year earlier, as sales at stores open at least a year slipped 0.7%. The company attributed part of the decline to a shift in the timing of its big Anniversary Sale, but also saw some weakness.

“We’ve experienced softness in our full line store sales with third quarter results consistent with recent trends but lower than what we anticipated as we started the year,” Blake Nordstrom, the company’s president said on a conference call with analysts. (…)

On Wednesday, Macy’s Inc. delivered strong sales and an upbeat holiday outlook that sent its stock up more than 9%. But the department-store chain is boosting discounts to draw in shoppers even at the expense of profit margins.

Kohl’s said it plans to ratchet up holiday marketing and discounts to bring more people into its stores after it cut its full-year profit outlook Thursday. The department-store chain reported its third-quarter earnings fell 18% as comparable-store sales dropped 1.6%. (…)

The Bentonville, Ark., retailer could face additional pressure on sales from the expiration of a temporary boost in food-stamp benefits. The expiration on Nov. 1 is expected to leave nearly 48 million Americans with $5 billion less to spend this fiscal year, which ends in September, according to the Center on Budget and Policy Priorities. The hit follows the end of a payroll tax break that had saved 2% of consumers’ monthly paychecks.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps, or about $14 billion of the $80 billion the U.S. Department of Agriculture says was appropriated for food stamps in the year ended in September 2012. (…)

“A reduction in gas prices and grocery deflation will help customers stretch their budgets, but they’re still trying to absorb a 2% payroll tax cut, uncertainty over Washington, and a lack of clarity around personal health care costs that are all headwinds,” Mr. Simon said. (…)

U.S. Worker Productivity Climbs

More productive U.S. workers supported faster economic growth in the third quarter, but slower business investment might limit future gains.

Labor productivity, or output per hours worked, increased at a 1.9% annual rate from July through September, the Labor Department said Thursday.

Second-quarter productivity growth was revised down to a 1.8% pace from a previous reading of 2.3%. Productivity held flat from a year ago because the increase in output was matched by an increase in hours worked.

Meanwhile, unit labor costs, a key gauge of inflationary pressure, declined at a 0.6% annual pace last quarter. From a year earlier, unit labor costs are up 1.9%—running ahead of the increase in consumer prices.

Industrial Output Runs Hard to Stay in Place

Industrial production in September returned to where it was before the recession, based on a Fed index. But certain index components are way above or below that level, providing a telling set of statistics about today’s economy.

September’s industrial-production data, which cover the period just before the government shutdown, seemed encouraging at first glance. The index expanded 0.6% over the prior month, well ahead of predictions and the fastest pace in seven months. But the strength lay entirely in utilities output, which makes up a 10th of the index. The sixth-warmest September on record for the contiguous 48 states followed a summer that was milder than the year-ago period. Actual manufacturing production, which comprises three-quarters of the index, rose by just 0.1%.

U.S. Trade Gap Widens as Exports Slip

The U.S. trade deficit widened 8%, as a fall in U.S. exports in September suggests the global economy is struggling to gain traction quickly enough to offset tepid demand at home. (Chart from Haver Analytics)

Exports fell 0.2% while imports rose 1.2%, causing the trade gap to expand for the third-straight month.

The report suggests exports, after rising earlier in the year, slumped during the summer as demand weakened in Europe, Japan and developing economies. The three-month moving average of exports, a reading of the underlying trend, slipped for the first time since May. (…)

U.S. exports to the EU from January through September fell 2.7%, compared with the same period a year earlier. Exports to the U.K. were down 15.1%, and exports to Germany fell by 4.5%.

The European Union accounts for roughly 17% of the market for U.S. exports.

The U.S. is also seeing lower demand from Japan, whose export-driven economy is struggling amid weak overseas demand. U.S. exports to Japan this year through September were down 7.6% compared to a year earlier.

September’s drop in overall exports was broad-based, with falling demand for American industrial materials as well as consumer and capital goods.

U.S.: Downward revisions to Q3 GDP?

The US goods and services trade deficit widened unexpectedly in September to US$41.8 bn, the worst tally in four months. The deterioration was due to rising imports and declining exports, the latter falling for a third month in a row in real terms. The results are worse than what the BEA had anticipated when it estimated Q3 GDP last week.

As today’s Hot Charts show, the agency estimated a less brutal deterioration in net exports of goods than what actually transpired. And with real exports of goods growing in Q3 at about a third of the pace estimated by the BEA, and real imports of goods growing faster in the quarter than what the agency had anticipated, it seems that trade may
have been a drag on the economy in Q3 rather than a contributor as depicted in last week’s GDP report.


We now expect a three-tick downgrade to Q3 US GDP growth from 2.8% to 2.5% annualized. Unfortunately, the bad news doesn’t end there. September’s weak trade results are also bad for the current quarter. The higher imports probably mean that the Q3 stock build-up was larger than first thought, meaning that there’s perhaps a higher likelihood of
an inventory drawdown (and hence a moderation in production) in the current quarter. If that’s the case, Q4 US GDP growth could be running only at around 1% annualized. (NBF)

Consumer Borrowing Picks Up

Americans stepped up their borrowing in the third quarter, a trend that could boost the economy—but, in a worrying sign, the nation’s student-loan tab also rose.

Household debt outstanding, which includes mortgages, credit cards, auto loans and student loans, rose $127 billion between July and September to $11.28 trillion, the first increase since late last year and the biggest in more than five years, Federal Reserve Bank of New York figures showed Thursday.

Taking on Debt Again

Mortgage balances, the biggest part of household debt, increased by $56 billion amid fewer foreclosures, while Americans bumped up their auto-loan balances by $31 billion.

At the same time, the amount of education loans outstanding, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to surpass $1 trillion for the first time, according to this measure. The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as late payments on other debts dropped.

Yellen Defends Fed’s Role, Current Path

Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

The nominee said at the hearing that the decision about winding down the program depended on how the economy performs. “We have seen meaningful progress in the labor market,” Ms. Yellen said. “What the [Fed] is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

She also repeated the Fed’s message that even after the bond program ends, it will keep short-term interest rates near zero for a long time because the bank doesn’t want to remove its support too fast.

The Fed’s next meeting is Dec. 17-18.

Surprised smile  Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

imageThe Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending.

John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Euro Zone’s Rebound Feels Like Recession

(…) Gross domestic product in the 17-country euro zone grew only 0.1% last quarter, or 0.4% at an annualized rate, data published on Thursday showed. The rate of growth was down sharply from the second quarter, when policy makers and economists began to hope that the clouds were clearing for the troubled currency bloc. (…)

Even Germany’s economy grew only 0.3% last quarter, or 1.3% annualized, as weak demand in Europe and patchy global growth hit its exports. (…) France and Italy, the bloc’s next-biggest economies after Germany, both suffered small contractions.



Industrial production down by 0.5% in euro area

IP in the Euro 17 area was down 0.5% MoM in September and for Q3 as a whole. IP of durable consumer goods were –2.6% MoM in September and –4.1% QoQ in Q3.


EU Inflation Slows to Four-Year Low

The EU’s official statistics agency said Friday consumer prices rose 0.9% in the 12 months to October, a lower annual rate of inflation than the 1.3% recorded in September, and the lowest since October 2009.

Eurostat also confirmed that the annual rate of inflation in the 17 countries that share the euro was 0.7% in October, the lowest level since November 2009.



Core inflation was +0.8% in October, down from 1.0% in September.


Brussels warns Spain and Italy on budgets

France’s ‘limited progress’ on reforms also under spotlight

Brussels has warned Spain and Italy that their budget plans for 2014 may not comply with the EU’s tough new debt and deficit rules, a move that could force both countries to revise their tax and spending programmes before resubmitting them to national parliaments.

The verdicts, the first time the European Commission has issued detailed evaluations of eurozone government budgets, also include a warning to France that its economic reform plan constitutes only “limited progress” towards reforming its slow-growing economy.

Earnings Season Ends

The third quarter earnings season came to an end today now that Wal-Mart (WMT) has released its numbers.  Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates.  Below is a chart comparing this quarter’s beat rate to past quarters since 2001.  Since the bull market began in March 2009, this is the second worst earnings beat rate we’ve seen.  Only Q1 of this year was worse. 

(…) the 8-quarter streak of more companies lowering guidance than raising guidance was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points.  When will companies finally offer up positive outlooks on the future?

China to Ease One-Child Policy

Xinhua said authorities will now allow couples to have two children if one of the parents is an only child. Currently, couples are restricted to one child except in some areas.

Morning MoneyBeat: Nasdaq Nears 4000

The Nasdaq Composite is poised to cross 4000 for the first time in 13 years, an event that is sure to prompt comparisons to the dot-com bubble. It shouldn’t.

(…) The Nasdaq is now dominated by mostly profitable companies. Names such as have come and gone, replaced by more mature companies, plenty of which sit on loads of cash and pay hefty dividends. Apple Inc,, Microsoft Corp. and Cisco Systems Inc. are bigger and return much more cash to shareholders now than they did during the go-go days. The index also trades at a far cheaper multiple than it did 14 years ago.

Light bulb  Berkshire Reports New Stake in Exxon Mobil

Warren Buffett’s Berkshire Hathaway disclosed it had picked up a $3.45 billion stake in Exxon Mobil, a sizable new addition to its roughly $107 billion portfolio of stocks.

The stock was likely picked by Mr. Buffett himself, given the size of the investment.


NEW$ & VIEW$ (14 OCTOBER 2013)

Democrats in Senate Press New Front in Budget Battle

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

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

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

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

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

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

Thinking smile  Europe Stocks Slip as Stalemate Drags On

U.S. Stock Futures Fall on Debt Concerns



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

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

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

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

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

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

Ghost  This good analysis should worry you:

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

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

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

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

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

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

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

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

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

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

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

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

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


Here’s the YoY trend:



Housing Affordability Hits Four-Year Low

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

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

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

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

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

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


China’s Exports Shrink

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

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

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

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

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

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

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

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

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

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

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

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

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

In annual terms, food prices jumped 6.1 percent.

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

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


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

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

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

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

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

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

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

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

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

The WSJ digs deeper:

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

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

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

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

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

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

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

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

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


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

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

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

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

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


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


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


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

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

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


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


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


NEW$ & VIEW$ (19 AUGUST 2013)


We now have Q2 reports from 446 of the S&P 500 companies. Based on S&P data, the beat rate slipped again to 65.2% while the miss rate rose to 27.3%. Interestingly and worryingly, only 3 sectors had a higher beat rate than the average: Health Care (76.9%), Financials (70.4%) and IT (71.9%). The other 7 sectors had a beat rate of 59.7%, down from 62.3% in Q1 and an average of 61.7% in the 3 previous quarters.

Factset notes that 92 companies have preannounced Q3, 81.5% negative. That compares with 94 preannouncements at the same time after Q1 with 79.8% negative and 95 preannouncements after Q4’12 with 75.8% negative. Of the 92 recent preannouncements, 49 were in the 3 sectors with the highest beat rates in Q2 and 40 (81.6%) were negative.

Q2’13 earnings are now estimated at $26.38, up 3.7% YoY. Trailing 12-month operating earnings would thus reach $99.30, up 1.0% from their level after Q1 and barely exceeding the last 18 months tight range of $97.40-$98.69.

Q3 estimates are $27.14, up 13% YoY while Q4 is seen jumping a whopping 26% YoY. Analysts are not meaningfully reducing their second half forecasts even though revenues are up a slow 3.4% YoY and trailing 4-quarter margins have plateaued during the last 12 months. They are obviously counting (hoping?) on a recovery from the weak Q3 and Q4’12 margins but even a return to 2011 margins would not boost earnings anywhere near their forecasts unless revenues really take off. I calculate that assuming quarterly margins return to their 2012 peak levels on a 5% increase in revenues, operating profits would rise 12% in Q3 and 13.5% in Q4. These apparently optimum conditions would take full year EPS to $105.30, nearly 3% lower than current expectations of $108.41.

Adding to the risk, it should be noted that only Financials recorded a meaningful increase in margins in Q2 (14.8% vs 12.4% last year). Ex-Financials, S&P calculates that earnings grew only 1.1% as margins declined from 9.2% last year to 8.9%. Trailing 4Q margins ex-Financials have been in a downtrend since Q3’11, dropping steadily from 9% to 8.6% during this 2-year period.


And here’s something that won’t help:

Productivity Growth Comes To A Halt

Cape crusader
Ratio is too negative, says Jeremy Siegel

Jeremy Siegel adds his support to my views on the Shiller P/E and profit margins in today’s FT:

(…) I believe the Cape ratio’s overly pessimistic predictions are based on biased earnings data. Changes in the accounting standards in the 1990s forced companies to charge large write-offs when assets they hold fall in price, but when assets rise in price they do not boost earnings unless the asset is sold. This change in earnings patterns is evident when comparing the cyclical behaviour of Standard and Poor’s earnings series with the after-tax profit series published in the National Income and Product Accounts (NIPA). (…)

Downward biased S&P earnings send average 10-year earnings down and bias the Cape ratio upward. In fact, when NIPA profits are substituted for S&P reported earnings in the Cape model, the current market shows no overvaluation.

On the above, Prof. Siegel omits another important flaw of the current CAPE reading: most of the companies that recorded humongous losses in 2008-09 are no longer in the index. As I wrote in The Shiller P/E: Alas, A Useless Friend:

This is like assessing a baseball team’s current batting line-up using 10-year data that includes the dismal stats of now deceased players. How useful is that?

On profit margins:

A second argument used by bears is that the profit margins (the ratio of earnings to sales) of US companies are at unsustainably high levels and are likely to fall. Indeed, in 2012 profit margins of S&P 500 companies (based on operating income) reached 8.9 per cent, well above the long-term average of 7.2 per cent.

But David Bianco, chief equity strategist at Deutsche Bank, has shown that most of the margin expansion over the past 15 years has come from two factors: the increased proportion of foreign profits, which have higher margins because of lower corporate tax rates; and the increased weight of the technology sector in the S&P 500 index, a sector that usually carries the highest profit margins.

Higher profit margins also result from stronger balance sheets. The Federal Reserve reports that since 1996, the ratio of corporate liquid assets to short-term liabilities has nearly doubled, and the proportion of credit market debt that is long term has increased to almost 80 per cent from about 50 per cent. This means many companies have locked in the recent record low interest rates and will be much less sensitive to any future increase in rates, keeping margins high. (…)

Economists Trim 2013 GDP Growth Forecasts

The third-quarter survey of 41 forecasters done by the Federal Reserve Bank of Philadelphia shows the consensus view on gross domestic product expects growth of 1.5% for all of this year, down significantly from 2.0% expected when the survey was last done in May.

Part of the downward revision reflects the refiguring of historical GDP reported last month by the Commerce Department. But the economists in the Philadelphia Fed survey also expect the second half of 2013 will be less robust than they expected three months ago. The median forecast thinks real GDP will grow 2.2% this quarter and 2.3% in the fourth quarter, down from 2.3% and 2.7%, respectively.

For 2014, forecasters expect real GDP to grow 2.6%, down from 2.8% projected in May.

Asia Faces Higher Borrowing Costs

Low rates have been a significant motor of Asia’s developing economies. Now, rising U.S. rates are making it harder for Asian issuers to raise funds cheaply.


Debt loads in emerging Asia—measured as total public and private borrowing as a percentage of gross domestic product—rose to 155% in mid-2012 from 133% in 2008, according to McKinsey Global Institute, a unit of consulting firm McKinsey & Co.

Thai Economy Slows Sharply

Thailand’s economy entered a technical recession in the three months through June as China’s slowing growth and weak demand in the U.S. continued to weigh on exports, adding to signs of woes across Asia.

Thai gross domestic product, the broadest measure of economic activity, contracted 0.3% on a seasonally adjusted basis from the first quarter. GDP was 1.7% lower in the first three months of 2013 compared with the previous period.

The planning agency downgraded its full-year growth forecast to between 3.8% and 4.3% from a previous range of 4.2% t0 5.2%.

Thai exports fell 1.4% on quarter, driven lower by weak overseas sales to China, Thailand’s largest market, as well as the U.S. and Europe. Private consumption was 1.9% lower on quarter as the government phased out a tax-rebate program. The nation’s current account swung from a $1.3 billion surplus in the first quarter to a $5.1 billion deficit in the second quarter as exports slumped.

India fails to prevent fresh falls for the rupee

Currency hits new record low despite government measures


India and Indonesia appeared trapped in a race to the bottom on Monday, as both the rupee and the rupiah fell sharply against the US dollar, prompting a sell-off in equities.

The Indian rupee continued its relentless decline, hitting the latest in a series of all-time lows against the US dollar and dashing hopes the government had succeeded in calming the country’s unsettled financial markets. (…)

Like India, Indonesia relies on foreign capital to fund its deficits. But global investors have been pulling back from emerging markets since May, amid expectations the US could soon start reversing its ultra-loose monetary policy. (…)

The fresh currency falls also increased pressure on the debt markets. Yields on India’s 10-year debt spiked above 9 per cent for the first time since late 2011, while Jakarta’s cost of borrowing jumped 18 basis points to the highest level since March 2011. (…)

From FT Alphaville:

That’s the Jakarta Composite down more than 5.5 per cent at pixel time on Monday, anyway.

U.S. Manufacturers Regain Footing

After a decade of losing ground to China and other export powerhouses, U.S. manufacturers are finally showing signs of regaining their competitive edge.

(…) In a report for release Tuesday, BCG says rising exports and “reshoring” of production to the U.S. from China “could create 2.5 million to five million American factory and service jobs associated with increased manufacturing” by 2020. That, BCG says, could reduce the unemployment rate, currently 7.4%, by as much as two to three percentage points.

The overall U.S. trade deficit, meanwhile, narrowed recently, as new shale-drilling technologies have sharply boosted domestic energy production.

At present, about 12 million Americans are directly employed by manufacturers, down from nearly 17 million two decades ago. (…)

The U.S. accounted for 11% of global exports of manufactured goods in 2011, down from 19% in 2000, Mr. Preeg said. During the same period, China’s share rocketed to nearly 21% from 7%, and the European Union slipped to 20% from 22%.

China’s performance has cooled recently. U.S. exports of manufacturing goods to China surged 19% to $19.9 billion in the second quarter, Mr. Preeg said, but that is about one-fifth of China’s manufacturing exports to the U.S. (…)

Meanwhile, China no longer relies heavily on labor-cost advantages to get a leg up on other countries. As wages rise, China has shifted to more exports of higher-tech items, including telecommunications equipment, computers and scientific instruments, Mr. Preeg said. Only about 15% of China’s manufacturing exports are in labor-intensive industries, such as textiles or shoes, he said.

Value of US fuel exports soars
Petroleum and coal top growth rankings at $110.2bn

(…) According to Census bureau export data reviewed by the FT, the value of petroleum and coal exports more than doubled from $51.5bn in the year to June 2010 to $110.2bn in the year to June 2013. This placed it at the top of the rankings of export growth.

Oil and gas exports were second, with a 68.3 per cent increase over the same period but based on smaller nominal values. Primary metals and livestock exports have also experienced strong export growth under Mr Obama, well above the average 32.7 per cent for all commodities. (…)

China’s House Prices Spark Concern

[image](…) Prices rose an average 6.7% year-over-year in July, up from 6.1% in June, calculations by The Wall Street Journal based on official data released Sunday showed. On a month-to-month basis, the increase in prices moderated slightly. (…)

New home prices in major cities like Beijing, Shanghai and Guangzhou showed the largest gains in July. Export hub Guangzhou in China’s southeast recorded the largest year-over-year gain among the 70 cities tracked—a 17.2% increase. On a sequential basis, the increase in prices moderated—up 0.68% month-to-month in July, down from 0.78% in June, calculations showed.

Pointing up  China’s Xi Embraces Mao as He Tightens Grip


(…) It isn’t just Mr. Xi’s rhetoric that has taken on a Maoist tinge in recent months. He has borrowed from Mao’s tactical playbook, launching a “rectification” campaign to purify the Communist Party, while tightening limits on discussion of ideas such as democracy, rule of law and enforcement of the constitution.

Mr. Xi’s apparent lurch to the left comes as Chinese authorities prepare for the coming trial of Bo Xilai, the former party rising star who led a Maoist revival movement until his dramatic downfall last year. Two of Mr. Bo’s lawyers said they expected the trial where he faces corruption charges to take place next week. Before he was detained, Mr. Bo rejected allegations of corruption.

The Chinese president’s Maoist leanings have dismayed many advocates of political reform, who hoped that Mr. Bo’s downfall signaled a repudiation of his autocratic leadership style and might lead to a strengthening of the rule of law and other limits on party power.

But Mr. Xi’s recent record has delighted and emboldened many former Bo supporters who advocate stronger, centralized leadership as the solution to the country’s problems. (…)

Mr. Xi’s use of Maoist imagery, rhetoric and strategy sets him apart from his two predecessors—who both emphasized collective leadership—and suggests to many party insiders that he won’t pursue meaningful political reform during the 10 years he is expected to stay in power. (…)

The new Chinese leadership has also ordered officials to combat the spread of “seven serious problems” including universal values, press freedom, civil society and judicial independence.

At the same time, state media have published a series of attacks on civil society and “constitutionalism”—the idea that the party’s power be limited by China’s existing constitution. (…)

Mr. Xi’s attitude toward political reform is a critical issue in China today because the country may be entering a prolonged period of slower economic growth and mounting public discontent over environmental problems, patchy public services and widespread corruption. (…)

On the political front, however, Mr. Xi has shown no sign of considering even limited liberalization, party insiders say. “Xi is really starting to show his true colors,” said one childhood friend who recalls Mr. Xi spending hours reading books on Marxist and Maoist theory as a teenager. “I think this is just the beginning.” (…)

Yet rather than losing faith in one-party rule, both Mr. Xi and Mr. Bo had worked harder than many contemporaries to prove their allegiance to Mao as young men, and had been left with a heightened sense of how to get ahead in Chinese politics.

“Their thinking is quite similar: They have the same Maoist education, the same red family background, and the same experiences growing up,” said Zhang Lifan, a historian whose father was a senior official. “When they face a problem, they revert quickly to Maoist thinking.” (…)

Ninja  Russia Moves to Restrict Imports if Ukraine Signs EU Deal

Russia is moving to clamp down on imports from Ukraine if its ex-Soviet neighbor signs a landmark free-trade and political-association deal with the European Union, a senior adviser to President Vladimir Putin said.

The comments Sunday by Sergei Glazyev, a senior economic advisor to Mr. Putin, signal a more forceful approach by the Kremlin to the potential deal, which could anchor Ukraine, for centuries ruled from Moscow, more firmly in the West. Moscow is urging Ukraine, a Texas-sized country sandwiched between Russia and the EU, to join a rival trade bloc that it is forming with other former Soviet republics.

Russia last week began tougher checks at the border that Ukrainian exporters said stalled shipments and caused serious financial losses.

Mr. Glazyev said Sunday that those checks were “preventative measures” in preparation for changes in customs procedures if Ukraine signs the EU pact. (…)

A post on Swedish Foreign Minister Carl Bildt’s Twitter blog Thursday said it would be “very serious” if Russia was starting a “silent trade war against Ukraine to block its relations with the EU.”


U.S. Stocks Beat BRICs by Most Ever on Emerging Flight

Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index (SPX) trades at 16 times profit, 70 percent more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.

Cash is draining from emerging-market ETFs and flowing into U.S. stock funds at the fastest rate on record as bulls say an unprecedented third year of higher earnings growth will support the S&P 500 even as the Federal Reserve begins to remove stimulus. Developing-nation investors say the ETFs will lure more cash after equity valuations reached a four-year low. (…)

The last time U.S. shares traded at such a premium and volatility versus emerging-markets was similar to now, was in June 2004, when the Fed started to raise interest rates from a 45-year low of 1 percent. Emerging markets rallied 29 percentage points more than the S&P 500 in the next 12 months, according to Bloomberg data. (…)


NEW$ & VIEW$ (2 AUGUST 2013)

Auto  U.S. Vehicle Sales Remain Firm

Unit sales of light motor vehicles slipped 1.8% during July versus June to 15.67 million (SAAR) according to the Autodata Corporation. Despite the dip, sales remained up 11.2% from July of last year and were nearly their strongest since December 2007.

Auto sales dipped 1.0% m/m (+10.4% y/y) to 7.88 million last month.  Light truck sales declined 2.7% (+12.1% y/y) in July to 7.79 million.

Imports’ share of the U.S. car market recovered m/m to 29.0% but remained down from its 37.8% monthly peak in 2010.


Pointing up  Japan carmakers accelerate as yen falls

(…) The fall in the yen, which has been driven in large part by a monetary expansion by the Bank of Japan aimed at ending prolonged consumer-price deflation, has allowed carmakers to book more profit while, in some cases at least, reaching for greater market share by cutting the prices they charge foreign customers.

Nissan’s US sales expanded 20 per cent last quarter after it cut prices on seven models including its top-selling Altima saloon.

The beneficial effects of the yen have been magnified by cost cuts implemented by Japanese carmakers during the currency’s relentless climb between 2007 and last year.

Taken together, the competitive shift has put carmakers in other countries on the defensive. Last month Ford’s top executive in Washington attacked the Japanese economic policies that have weakened the yen and said Japan was unfit to join the Trans-Pacific Partnership, a proposed regional trade pact that it began talks to enter last month. (…)

Karl Brauer, senior analyst at Kelley Blue Book, the car information service, said Toyota could struggle to protect its share of the market as Americans rediscover their preference for larger vehicles – Detroit’s traditional strength.

“It’s confirmation Toyota has revitalised its production efficiency. That’s impressive, but it can’t stop a US market shift toward large trucks and SUVs,” he said. (…)

U.S. Construction Spending Backpedals

The value of construction put-in-place declined 0.6% (+3.3% y/y) during June after a revised 1.3% May jump, initially reported as 0.5%. April’s increase also was revised up to 1.1% from 0.1%. Declines in building activity were logged across sectors. The value of public sector building experienced the largest decline and was off 1.1% (-9.3% y/y).

Private sector building activity also showed weakness, posting a 0.4% decline (+9.7% y/y) in June. That reflected a roughly unchanged (18.1% y/y) level of residential building. It  owed to a 3.3% collapse (+40.6% y/y) in multi-family construction and a 0.8% drop (+28.2% y/y) in single-family building. Spending on improvements rose 1.7% (4.4% y/y). Nonresidential building activity declined 0.9% (+1.4% y/y), pulled lower by a 6.6% slump (-0.8% y/y) in education and a 5.6% drop (0.0% y/y) in commercial building.

 large image

ISM Manufacturing Spikes to Highest Level Since June 2011

Following on the heels of stronger than expected Manufacturing PMIs across the world, the ISM Manufacturing jumped from 50.9 to 55.4 in July for its largest one month increase since June 1996.  That’s right.  The ISM Manufacturing report has not had a one month increase like this in 17 years!

Looking at the internals of this morning’s report shows that six components rose this month, while just three declined.  Relative to last year, this month’s report was even stronger as the only two components that declined were Business and Customer Inventories.  Besides the big jump in the headline reading, the most notable aspect of the ISM Manufacturing report for July was the Production component, which increased from 53.4 to 65.0.  That is the highest level since May 2004 and represents the 7th largest monthly increase going all the way back to 1948.

Global manufacturing growth remains lacklustre in July

The global manufacturing sector made a subdued start to the third quarter. At 50.8 in July, the JPMorgan Global Manufacturing PMI™  remained only slightly above the no-change mark of 50.0.


Rates of expansion in production and new orders were broadly unchanged from the modest levels signalled during the second quarter of the year. July nonetheless saw output and new orders rise for the ninth and seventh successive months respectively.

National PMI suggested that the Asia region was the main drag on global manufacturing growth during July. Production volumes declined in China, India, Taiwan, South Korea and Vietnam, stagnated in Indonesia, while growth slowed to a five-month low in Japan. Elsewhere, Spain, Brazil, Russia, Mexico, Australia and Greece also reported contractions.

In contrast, output growth hit a four-month high in the US, near two-and-a-half year high in the UK and returned to expansion for the first time since February 2012 in the eurozone. Eastern Europe also faired better, with production rising in both Poland and the Czech Republic. The upturn in Canada extended into its third successive month.

The level of new export orders – an indicator of international trade flows – rose for the fourth time in the past five months, although only slightly. Growth of new export business was registered in the US, the eurozone, Japan, Canada, India, Poland, Czech Republic, Singapore and Russia.

Pointing up  Here’s a good, realistic, economic snapshot from Moody’s, unlike most brokerage reports:

The Limpest Recovery Since WWII Weighs on Revenues and Profits

Though 2012’s real GDP growth was revised up from 2.2% to 2.8%, the 2.2% average annualized rise by real GDP for the current recovery to date was slower than the 2.8% of 2002-2007’s upturn, which was the erstwhile “worst recovery since the Second World War.”

The Fed is more likely to begin tapering if fourth quarter 2013’s real GDP grows by at least 2.3% to 2.6% year-over-year. However, as inferred from Q2-2013’s 1.4% yearly rise by real GDP, real GDP is unlikely to achieve the Fed’s threshold by the final quarter.

After edging higher by merely 1.4% annualized during 2013’s first half, the consensus expects that real GDP will grow by between 2.5% and 3% annualized through the middle of 2014. This forecast assumes an end to the sequester and a rise by the annualized growth of real consumer spending from first half 2014’s 2.0% to 2.6%.

However, the current political dynamic favors a continuation of sequestration. Moreover, consumer spending may have difficulty reaching its projected growth if home sales subside and incomes do not accelerate.

Jobs growth may slow according to the sluggishness of revenues, profits, and labor productivity. Ordinarily the recent 1.6% yearly increase by payrolls would be joined by 3% growth for real GDP, which is well above the actual 1.4% growth rate. The latest deficiency of GDP growth relative to what otherwise is suggested by payrolls reflects a notable deceleration of labor productivity. The slowdown by productivity suggests a drop in the quality of new jobs. And lower quality jobs tend to be associated with below-trend income growth.

And, let me add, lower productivity likely means lower profit margins (see below on that). And if margins don’t rise, it might be difficult to report strong profit gains, especially if revenues grow only 2.0% YoY like we are seeing in Q2.


S&P’s tally of Q2 earnings is now 72% complete. The beat rate is 66%, unchanged from last week, and the miss rate is 24.8%, also in line with last week’s. The overall beat is slim, however, being only 0.4% above estimates. It looks like operating margins will shrink a little.

Note however that the bulk of the remaining companies to report are in Energy, Consumer, Telecom and Utilities where the miss rates have been well above average.

Q2 earnings are now seen at $26.41, down $0.27 or 1.0% from last week’s estimate. Analysts have shaved their forward estimates just a little: Q3 is now estimates at $27.33 (vs $27.42 last week), up 13.9% YoY, and Q4 is $29.18 (vs $29.25), up a truly spectacular 26% YoY. If you are using forward earnings, 2013 EPS are estimated at $108.70 and 2014 at $122.42. Beware, however, since Q1 EPS were up 6.3% and Q2 are on track to rise 3.9%. Also. consider that other than during 2010 when profits bounced from the appalling low base of 2008-09, growth rates in the high 20’s are truly exceptional, the last sighting being in early 2004. For reference, I include Ed Yardini’s chart below:

Here’s another proxy for sales: total business sales (YoY):


Same series but monthly rates of growth. see any growth pattern there?

FRED Graph

I keep using trailing EPS and these are now seen at $99.33 after Q2, barely breaking the $97-98 range of the last 6 quarters. Meanwhile, the S&P 500 Index soared 21% while inflation remained stable at 1.7-1.8%.

As a result, the Rule of 20 fair value remains stuck at around 1800 where it has been since April 2012 (yellow line on chart), leaving only 6% upside to fair value (blue line meeting yellow, or black line hitting the red “20” line). Equities were 29% undervalued in early June 2012 (1278 on the S&P 500 Index). The whole rally has been from the result of higher valuations, courtesy of central bankers and gradually more upbeat media coverage.


Since trailing earnings will remain unchanged for another 3 months, market sentiment will be the only support for equities which currently trade 5% and 10% above their 100-day and 200-day moving average respectively.

This is the 3rd time since March 2009 that the S&P 500 Index has been at or close to fair value (black line on chart). Equities dropped 16% in early 2010 and 18% in mid-2011, even though earnings were still rising nicely (rising yellow line), providing a value backstop that is not apparent at this critical juncture.



Fingers crossed Europe Sees Bottom of Downturn as Daimler Leads Rebound From German luxury carmaker Daimler AG and French builder Vinci SA to International Business Machines Corp. and 3M Co., global companies say the worst is over for Europe.


Money Europe Banks Pare Cash Stockpiles

Some European banks are planning to deploy a counterintuitive tactic to improve the appearance of their financial health: whittling down their huge cash stockpiles.

The maneuver will boost the banks’ so-called leverage ratios, which a growing number of regulators and investors are using as a key gauge of banks’ financial safety.

But by reducing their cash hoards by billions of dollars, the banks would be moving away from the ultimate low-risk asset. Some analysts said the move is a gamble that is unlikely to please regulators or risk-averse investors.


With a financial crisis raging and regulators pushing banks to be ultraconservative, many European banks in recent years amassed ever-greater sums of cash on deposit at central banks. The total cash holdings of a dozen of Europe’s largest banks soared to about $1.3 trillion at the end of last year, up 55% from 18 months earlier, according to a Wall Street Journal tally.

That trend started ebbing earlier this year. But in the past week, at least three big European banks—Barclays PLC, Deutsche Bank AG and Société Générale SA signaled that they plan to accelerate their shifts away from cash.

The moves coincide with U.S. and European regulators’ recent embrace of the leverage ratio as an important measure of banks’ safety. The leverage ratio consists of banks’ equity as a percentage of their total assets. Shedding assets therefore represents an easy way for banks to strengthen their ratios. (…)

To the frustration of many bank executives, the leverage ratio doesn’t take into account different levels of risk among assets. So for two banks with similar amounts of equity, their leverage ratios would be the same even if one bank was brimming with toxic assets and the other was holding nothing but cash. (…)

Some analysts, though, suspect banks are threatening to drain their liquidity pools in an attempt to cajole regulators to back away from the leverage ratio. (…)

Indeed, some banks are pushing regulators to let them exclude assets in their liquidity pools from the denominator of their leverage ratios, industry officials say. Such a change would boost most banks’ leverage ratios and make it easier for them to avoid issuing new equity or dramatically cutting costs.


NEW$ & VIEW$ (25 JULY 2013)

U.S. New-Home Sales Surge 8.3%

Sales of newly built homes rose to a five-year high in June, boosting a key sector driving the economic recovery.

New-home sales increased 8.3% last month to a seasonally adjusted rate of 497,000, the Commerce Department said Wednesday. That was the highest level since May 2008. Sales were up 38% from a year earlier.

The stock of new homes for sale at the end of June was 161,000. That would take 3.9 months to deplete at the current sales pace, the quickest since January. Meanwhile, the median price for a new home sold in June was $249,700, up 7.4% from that time last year.

However, new home prices declined by 5.0% MoM in June, following a 6.8% decrease in May.

Pointing up The latest report showed that sales were weaker in earlier months than previously reported. May’s pace was revised down to 459,000 from  476,000, and April’s figure also was a slower rate than first estimated. (Charts from Haver Analytics)



Orders for U.S. Durable Goods Increase More Than Forecast

Bookings for goods meant to last at least three years increased 4.2 percent, led by transportation equipment, after a revised 5.2 percent gain in May that was bigger than initially reported, the Commerce Department said today in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 1.4 percent advance. Unfilled orders for big-ticket goods rose the most since December 2007.

Orders excluding transportation equipment, which is volatile month to month, were unchanged after a 1 percent advance in May that was twice as much as previously estimated.

Pointing up  Orders for non-defense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, climbed 0.7 percent in June after rising 2.2 percent the prior month.

Here’s Doug Short’s chart that matters:

Click to View

And Zero Hedge’s one to keep you gloomy. Note that this is for shipments, not orders:

The WSJ continues:

In a sign industrial production will be sustained, the backlog of orders to factories jumped 2.1 percent in June, the most since the end of 2007. Unfilled orders for non-military capital goods excluding transportation equipment climbed 1.7 percent last month after a 1.2 percent increase.

Thumbs down  Macroeconomic Advisers in St. Louis, which updates its estimate of gross domestic product with each new piece of data, forecasts the economy grew at a 0.7 percent annual rate in the second quarter, down from a 1.7 percent estimate at the start of July. Second-quarter data are scheduled to be released July 31. The world’s largest economy expanded at a 1.8 percent pace in the first quarter.

Growth is projected to pick up in the second half of the year, climbing 2.3 percent in the third quarter and 2.6 percent in the last three months of the year, according to the medians in a Bloomberg survey of 70 economists.

Construction Index Dips in June, Still Shows Growth

The Architecture Billings Index, released by the American Institute of Architect son Wednesday, dipped to 51.6 in June from 52.9 in May. Despite the slip, the index remained in growth territory and was led by the new projects inquiry index component, which jumped to 62.6 from 59.1 the previous month.

The two-month sustained positive numbers come after a dip into negative territory in April, when the index fell to 48.6, the first time in 10 months the index had dropped below 50.

Billings were strongest in the Northeast, which had a reading of 55.6. The South posted a 54.8, the West 51.2, and the Midwest trailed with 48.3.

The commercial and industrial sector index led with 54.7, followed by multi-family residential with 54.0. The mixed-practice segment, a combination of retail and residential space, and the institutional segment were both in positive territory.


Obama Turns Focus to Economy

(…) In the first of a series of about a half-dozen speeches that will lay out his blueprint for sustained economic growth, Mr. Obama offered mostly familiar policy prescriptions. (…)

“Washington has taken its eye off the ball. And I am here to say this needs to stop,” he said at Knox College here, positioning himself as an outsider in the debates in the nation’s capital. (…)

Mr. Obama’s own job-approval rating has slumped to 45%, the lowest level for him since late 2011, while disapproval of Congress has reached a record 83%. (…)

Sprinkled throughout the speech were familiar proposals, including calls for investments in infrastructure; government job training programs that are more directly connected to business needs; expanded pre-kindergarten programs; federal policies designed to reduce college costs; and an increased minimum wage.

He also called for an end to the across-the-board spending cuts known as the sequester, which he described as a meat cleaver that has cost jobs and harmed growth. And he made a new pitch for an overhaul of the immigration system, saying more legal immigrants could pay the taxes to help finance imperiled retirement programs. (…)

Hopeful Signs for Euro Zone

Businesses in Germany and the Netherlands became more optimistic about their prospects in July, as did Italian consumers, another indication that the euro zone is emerging from its longest postwar economic contraction.

Germany’s closely watched Ifo business confidence index rose to 106.2 in July, its third consecutive monthly increase. Italian consumer confidence hit its highest level in more than a year in July as households’ optimism about the economic outlook improved, official data showed Thursday. The Dutch producer confidence index reached its highest level since April 2012, but still came in negative at minus-3.5 in July, the statistics bureau CBS said, adding that Dutch businesses are only “slightly less pessimistic.”

But persistently weak loan growth suggests any recovery for the region’s economy is likely to be modest.

Surveys from Germany and Italy signaled that businesses and consumers are feeling more upbeat about their outlook, and business sentiment in the Netherlands also showed some improvement this month. The indicators come after euro-zone business activity expanded in July for the first time in 18 months, according to a closely watched survey released on Wednesday.

Weak demand for credit and risk-averse banks continue to drag on the economy, dampening any prospects for a full recovery in the euro zone. Loans to euro-zone businesses fell by €13 billion ($17.2 billion) in June, following similar drops in April and May, data from the European Central Bank showed Thursday. Loans to households also fell in June, the ECB said. (…)

Banks continue to expect demand for loans from firms to weaken in the third quarter as they further tighten standards, albeit at a slower pace, a quarterly ECB banking lending survey showed earlier this week, blaming weak fixed investment and economic uncertainty.

Spain’s jobless data boost recovery hopes
Economists caution improvement is due to seasonal factors

The number of unemployed Spaniards fell by 225,000 in the second quarter of the year, the largest such drop since the financial crisis started more than five years ago and a boost to government claims that the economy is finally picking up.

The fall takes the total jobless figure to 5.98m, while the rate decreased by 0.9 points to 26.3 per cent. (…)

The government was bolstered earlier this week when the Bank of Spain published an estimate showing that the economy may have contracted by as little as 0.1 per cent in the second quarter – after a drop of 0.5 per cent in the first three months of the year. If confirmed, the second-quarter estimate would be consistent with Madrid’s forecast of a return to growth in the second half of the year. (…)

Spain traditionally sees a spike in employment ahead of the summer tourist season.

That bounce is likely to have been even stronger this year, as holiday-makers from Germany, Britain and other European countries shun destinations such as Turkey and north Africa, which have suffered well-publicised bouts of political instability. (…)

Ford: picking up speed in Europe
Carmaker signals the worst may be over for the continent

Ford’s revival in Europe echoes results from General Electric. Last week, the industrial conglomerate said that orders in Europe were up 2 per cent. That does not sound great, especially when orders in the US were up 20 per cent, but European orders in the first quarter had been down a dispiriting 17 per cent and had contributed to disappointing earnings in that period.


Markit comments on its flash China PMI survey:

China manufacturing
Further downturn signalled as flash PMI drops to near post-crisis low in July

The headline PMI fell from 48.2 in June to 47.7, its lowest since last
August and signalling a third successive monthly deterioration of business conditions in China’s vast goods-producing sector. Since early-2009, the lowest reading of the PMI has been 47.6.

imageThe survey therefore adds evidence to suggest that the rate of growth of the world’s second largest economy has slowed further at the start of the third quarter, with growth having already weakened to an annual pace of 7.5% in the second quarter, which was the second-weakest pace seen for four years.

The slowdown is also not confined to the goods producing sector. The manufacturing PMI’s sister survey showed service sector growth slowing to near stagnation in the second quarter, indicating that the sector was undergoing one of the softest patches seen in the seven-and-a-half year history of the survey.

imageLooking at the details, the flash data showed output falling for a second successive month, dropping at the fastest rate since last October. New orders fell for the third straight month, likewise seeing the rate of decline accelerating, hitting the fastest since August of last year. Worryingly, backlogs of work fell to the greatest extent since January 2009, down for a third successive month.

imageThe acceleration in the rate of loss of orders was driven primarily by the domestic market. New export orders also fell, down for a fourth month running, but the rate of decline was the slowest since May.

China unveils measures to boost economy
Move indicates leadership’s concern about slowdown

(…) The “mini stimulus”, though limited in size, could herald more policy moves to prop up growth. The government will eliminate taxes on small businesses, reduce costs for exporters and line up funds for the construction of railways. (…)

First, it has temporarily scrapped all value-added and operating taxes on businesses with monthly sales of less than Rmb20,000 ($3,250). It said the tax cuts, which go into effect at the start of August, would help more than 6m enterprises which employ tens of millions of people

Second, the government pledged to simplify approval procedures and reduce administrative costs for exporting companies. Among the various moves, it said it would temporarily cancel inspection fees for commodities exports and streamline customs inspections of manufactured goods.

Third, it said it would create more financing channels to ensure that the country can fulfil its ambitious railway development plans. More private investors will be encouraged to participate and new bond products will be issued.

Ghost  SoGen on why China matters (via Business Insider)


“China is a major source of global demand,” with imports equivalent to 30% of GDP, Societe Generale Michala Marcussen points out in a new report. So a hard landing would have a major impact on economies that are reliant on China for their exports.

“Drawing on different studies, mainly from the IMF and the OECD, we estimate that the impact of the trade channel from the type of hard landing in China described in the previous section would cut GDP growth by around 4.5pp in Taiwan, 2.5pp in South Korea and Malaysia, 1.2pp in Australia, 0.6pp in Japan, 0.2pp in the euro area and 0.1pp in the US. For the global economy ex-China, the trade channel effects would bring about a reduction of around 0.6pp to GDP growth.”

There’s also the impact of the decline in investment, since “investment has significantly higher import content than consumption, most notably through commodities and machine tools.”

Here’s a look at the countries that would be hit the hardest by a slowdown in China:

countries hit by chinese slowdown

SocGen China

South Korea growth strongest in two years
Consumer spending helps buoy economy

The economy expanded a seasonally adjusted 1.1 per cent in the second quarter from the first three months of the year, the Bank of Korea said on Thursday. That marked its strongest performance since the first quarter of 2011. Compared with the same period a year earlier, gross domestic product grew 2.3 per cent. (…)

Construction contributed strongly to the growth, rising 3.3 per cent quarter-on-quarter. However, a decline of 0.7 per cent in facilities investment – particularly transport equipment – reflected fragile business confidence. Private consumption grew 0.6 per cent after a 0.4 per cent fall in the previous quarter, while exports of goods and services increased 1.5 per cent.

The central bank predicts full-year growth of 2.8 per cent, rising to 4 per cent in 2014. (…)

World Trade Volume Fell by 0.3% in May

In its monthly report, the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Wednesday said the volume of exports and imports fell 0.3% from April, having risen 1.3% in that month.

The decline in trade volumes was spread across the globe, although was sharpest in Central and Eastern Europe.

The CPB also provides a measure of world factory output, which was unchanged in May, having risen 0.2% in April.

Emerging economies now seem to be underperforming

Latest data from the CPB show that growth in global industrial production (IP) is on track to decelerate a bit in the second quarter. That’s mostly due to the worst IP growth in emerging economies since 2009, in sharp contrast with the uptick observed in advanced economies
(the latter due to the rebound in economic activity in Europe but primarily in Japan).

So much so that, as today’s Hot Charts show, the gap in IP growth between advanced and emerging economies in the second quarter was the biggest since the Asian crisis. And based on Markit’s July manufacturing purchasing managers’ indices, which showed a further worsening in China, it seems that advanced economies could continue to
outperform emerging ones in Q3 as well.

The eurozone despite its structural problems seems to be slowly
returning to growth as evidenced by July’s above-50 manufacturing PMI, Japan’s recovery is set to continue buoyed by loose policies from a government emboldened by its absolute control of parliament, while the US is set to bounce back after a temporary sequester-related setback in Q2. In the meantime, China’s rebalancing act is biting into growth, while other emerging economies continue to adjust not only to the loss of competitiveness relative to the yen, but also to the recent run up in bond
yields. (NBF Financial)




Bond Investors Look to Cash  Investors are cashing out of bonds but remain hesitant to plunge into stocks even as they reach new highs, preferring to buy money-market mutual funds despite their low returns

Investors withdrew an estimated $43 billion from taxable bond mutual funds last month, the largest-ever monthly outflow, according to the Investment Company Institute. (…)

But in a twist, the main beneficiary of the rush out of bonds has been money-market funds, which are cash-like investments that appeal to safety-minded investors.

Assets in these portfolios increased for the fourth week in a row in the week ended July 17, rising $8.5 billion to $2.6 trillion, ICI data show. That left money-market funds, which pay barely more than simply holding dollars, with the most cash since early April. (…)

An estimated $6.3 billion came out of U.S. stock mutual funds in June. But as markets stabilized this month, investors moved $7 billion back into U.S. stock mutual funds in the first two weeks of July, according to the ICI. (…)

Since the financial crisis, investors have plowed money into bond funds and pulled out of U.S. stock funds. Some $947 billion made its way into bond funds from the start of 2008 through the end of last year, compared with an outflow of $548 billion for U.S. stocks funds, according to ICI data. (…)


NEW$ & VIEW$ (24 JULY 2013)

Mid-Atlantic Manufacturing Activity Goes Negative

The Empire and Philly surveys were better than expected, but the Richmond survey was very weak.

The Richmond Fed’s manufacturing current business conditions dropped to -11 in July, from a downward revised 7 in June, which was the first positive reading since March.

The new orders index this month dropped to -15, from 9 in June. The shipment index this month fell to -15 from 11. Demand for labor stalled. The employment index held at zero, while the workweek index slipped to 2, from 11. The wage index fell back to 8, from 11. (…)

Despite discouraging present conditions, manufacturers appeared to remain optimistic looking out over the next six months.

The shipments-expectations index ticked up to 24 from 21 last month, and the orders-expectations index rose to 24 from 21 as well. The employee expectations slipped to 5 from 9 in June.

Activity on the service side also weakened in July. The Richmond survey’s revenues index fell to -6, from 12 in June.

This chart from Doug Short shows the volatility of the Richmond Fed Index.


Easing of Mortgage Curb Weighed Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis.

The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation.

The plan, which hasn’t been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago. (…0

Regulators also have discussed asking for public comment on a possible 30% down-payment requirement, people familiar with the situation said.

Federal Reserve governor Daniel Tarullo and Federal Deposit Insurance Corp. Chairman Martin Gruenberg have pushed to abandon the down-payment requirement and were sympathetic to arguments that it would add complexity for lenders without reducing the risk of borrowers’ defaults, according to a person close to the process. Confused smile

More on the last NAR report:

Listed inventory in June rose by 40,000 units from May to 2.19 million for-sale homes. Relative to last year, total listings are still down 7.6% and months’ supply still registers at a very healthy 5.2 months. Nevertheless, the sequential inventory increase (+1.9%) was larger than typical May-June patterns, as listings are typically flat between May and June (dating back to 1990). Inventory increases have now exceeded historical patterns in four of the last five months.

(…) the NAR reported 17% of homes purchased in June were bought by investors (down 2% y/y and 1% sequentially). That said, we note that 31% of all sales in June were still “all-cash” transactions (normally less than 10%), indicating that investors and other affluent households still remain a critical component of current housing demand. With rising home prices, distressed sales continued to dwindle to just 15% of sales (reaching the lowest level on record since tracking began in October 2008). Also highlighting the unusual nature of this housing recovery, first-time buyers represented just 29% of transactions – down substantially from normalized levels in the 40-45% range and usually even higher in early stages of previous recovery cycles. (Raymond James)

Majority of Americans Say U.S. Still in Recession

A majority of people — 54% — in a new McClatchy-Marist poll think the country is in an economic downturn, according to the survey conducted last week and released Tuesday.

One bright spot: July’s figure marks the lowest proportion of Americans who have held that view since 2008. About a third of those surveyed don’t think the economy is in a slump, while 8% are unsure, according to the poll. In March, 63% thought the economy was in recession. (…)

The McClatchy-Marist poll found that Americans who earn less are more likely to think the economy is in a recession. Of those earning less than $50,000 a year, nearly two-thirds say the downturn is still underway. For those earning more than that, only 47% think so.

Looking ahead, the study asked if Americans believe they will be better off economically in the next year. The group was split. Nearly a third said they will be, 32% thought they will be worse off and 39% said they will be in the same economic position.



Signs Suggest Beijing May Look at Stimulus

China’s government appears to be warming to the idea of stimulus measures as it is confronted with a steady drizzle of bad news on the economy.

In widely reported, though unverified, remarks this week, the premier stressed his commitment to meeting the 7.5% GDP target for this year. Growth fell to 7.5% on year in the second quarter from 7.7% in the first and many economists think it will slow further, making the annual target a write-off. That would make Mr. Li the first premier to miss the target since 1998. (…)

Of particular concern to policy makers is the labor market. HSBC’s employment subindex came in below the headline number at 47.3, the lowest level since March 2009, when firms laid off workers en masse in the teeth of the global financial crisis.

Pointing up Menzie Chinn at Ecobrowser adds this:

It’s in this context that one has to understand the recent liberalization of the deposit floor. This in itself has little effect; however to the extent it signals an imminent liberalization of deposit rate ceilings, we might soon see actual moves to ending the financial repression that has limited interest income to households and hence slowed consumption. [4] A more explicit and comprehensive linkage between financial reform and domestic rebalancing away from investment to consumption is provided by Nick Lardy (shorter here).

Pointing up China bans building of government offices
Xi’s austerity campaign rises to new level

China has banned the construction of government offices for the next five years, ratcheting up an austerity campaign that has already taken a toll on the economy.

The State Council, China’s cabinet, and the Communist party late on Tuesday said the ban, which takes immediate effect, would also apply to the expansion of existing buildings. (…)

Xi Jinping’s first move as party chief late last year was to bar lavish banquets, red-carpet receptions, wasteful travel and other trappings of corruption that have stained the public’s perception of the government.

Those measures have had a clear impact on the economy, leading to slower consumption growth in the first half of the year and dealing a blow to luxury goods companies around the world.

Whether the latest ban has a similarly negative impact on the property market will depend on how it is interpreted by state-owned companies. Chinese corporate executives have felt pressure to comply with Mr Xi’s earlier austerity policies even though government officials, not companies, were his targets. (…)



Smile  German Manufacturing Unexpectedly Expands as Services Accelerate

A manufacturing index based on a survey of purchasing managers rose to 50.3 from 48.6 in June, London-based Markit Economics said today. Economists in a Bloomberg survey predicted 49.2. A similar gauge for services rose to 52.5 from 50.4, compared with the median estimate of economists of 50.7.

High five  Markit added these meaningful comments, given the importance of exports for the German economy:

In the manufacturing sector, an improvement in order books was driven by rising levels of domestic demand as new export volumes dropped for the fifth consecutive month. Anecdotal evidence from survey respondents suggested that stronger demand from the domestic construction and autos industries had helped offset subdued spending patterns among clients in China and the euro area.

Storm cloud  Dutch Economy Springs Leak, Faces Stagnation

(…) The Netherlands is in its third recession since 2009 and faces a prolonged period of economic stagnation, according to the Dutch central bank.

As a result, the government—one of the main allies in Germany’s call for austerity—is wrestling to satisfy the EU’s budget rules and faces growing pressure to loosen its fiscal policy. (…)

Unemployment rose to 6.8% in June, statistics bureau CBS said, using a definition of the International Labour Organization. (…)

CBS said on Friday that household spending fell 1.8% on an annual basis in May and has declined for two years. Car sales in particular were down, but sales of clothing, home furnishings and domestic appliances and household products were also sharply lower. (…)


The Netherlands suffers from a so-called balance-sheet recession—one characterized by high debt levels that prompt households to save rather than spend—and they are usually longer and more severe than the average cyclical downturn.

While households are cutting spending to reduce debt, banks and the government are also cutting back to fix their finances. As a result, domestic demand is plummeting. (…)

Pointing up  ECB Sees Consumer Credit Standards Easing First Time Since 2007

A measure of consumer credit standards climbed to a net easing last quarter from a net tightening in the three months ended March, the Frankfurt-based ECB said in its quarterly Bank Lending Survey today. Banks tightened credit standards less for home loans and at the same rate for companies as in the previous quarter.

Euro-Area Debt-to-GDP Ratio Still Rising, Led by Greece

The debt-to-GDP ratio increased in every euro country during the year, Eurostat data show. Euroarea debt rose to 92.2 percent of GDP in the first quarter from 88.2 percent in the same quarter last year. Greece, Ireland and Spain had the largest increases in their debt ratios during the period, of 24.1 percentage points, 18.3 points and 15.2 points, respectively. Estonia had the lowest debt ratio – 10 percent of GDP. (Bloomberg Briefs)


 Hungary Cuts Interest Rates After 12 cuts in the past year, the central bank also gave notice of more to come.

Czech Central Bank Chief Signals Preference for Easing

The Ceska Narodni Banka would keep zero interest rates “for quite a long future” even if monetary conditions were “relatively more relaxed,” Singer said yesterday in an interview at the bank’s headquarters in downtown Prague. With no room left to cut borrowing costs, weakening the koruna is the next tool policy makers may use for easing, he said.


The latest S&P report on earnings, dated July 22, tallies 22% of the S&P 500 companies. Of the 109 companies that have reported, 63% beat estimates and 27.5% missed. Some 31% of the reports were from financial companies and their beat rate was 80%. Only 58% of the 84 non-financial companies that have reported beat estimates and 32% missed.

S&P says that Q2 EPS are coming in up 3.3% YoY, same for revenues.

Q2 estimates are now $26.57, down $0.20 from their June 28 estimate. Q3 and Q4 estimates are also being shaved but only by a few pennies.

Bespoke Investment tallies all NYSE companies: Earnings Beat Rate Picks Up

Last week we posted our first reading of the earnings and revenue beat rates for the second quarter reporting period.  At that time, 69% of companies had beaten earnings estimates and 50.3% had beaten revenue estimates.  A good chunk of companies have reported since our last post, and below are updated readings of the earnings and revenue beat rates.  As shown, the earnings beat rate has actually picked up a bit and is now at 71.2%.  The revenue beat rate has also increased 3 percentage points up to 53.2%.  


By S&P’s Howard Silverblatt:

In 2002, S&P Dow Jones Indices deleted foreign issues from the S&P 500, rendering the index a pure U.S. play. However, being an American company doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels are, unfortunately, difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intra-company sales, and therefore profits, are sometimes structured to take advantage of trade, tax and regulatory policy. The resulting reported data available for shareholders is therefore significantly less substantial than what we’d need to complete a truly comprehensive analysis.

However, by using what data is available, we offer annual reports on foreign sales, which are designed to be starting points that provide a rare glimpse into global sales composition but should not be considered statements of exact values.

imageOverall, company reporting has remained poor at best. While nice pictures and messages from senior management abound, tabular tables—not required under Generally Accepted Accounting Principles (GAAP)—are far and few between in the reports. Investors need to be careful when determining what data and statistics to use. To illustrate this point, based on the current 2012 reports, foreign sales appear to account for 28.1% of total sales. However, if we use only the companies that reported foreign sales, the rate increases to 43.2%. If we eliminate some of the “stranger” values, such as companies reporting over 100% or reporting a zero rate due to where (and how) the sales were booked, the rate calculates to 46.6%, an increase from the 46.1% rate for 2011. This adjusted rate is the rate we use for guidance and as a “holding spot” for the actual value.

Now let’s dig deeper. In 2012, European sales represented 9.2% of all S&P 500 sales, down from 11.1% in 2011 and 13.5% in 2010. The U.K. represented 1.7%, down from 2.4% in 2011, which had risen from 1.4% in 2010. The result is that European ex-U.K. sales represented 7.5% of all S&P 500 sales in 2012, down from 8.7% in 2011 and 12.0% in 2010. Asian sales increased to 7.7% from 7.2% in 2011 and 6.1% in 2010. Canadian sales continued to be volatile, even as Canada boasted a larger portion of sales than any other single country. Accounting for 4.0% of S&P 500 sales, Canadian sales are down from 4.3% in 2011, but up from 1.9% in 2010.

Information technology continued to be the most successful (and exposed) sector in terms of foreign sales. In 2012, 58.6% of its declared sales were foreign. The percentage of financial sector sales that were foreign again declined, coming in at 30.0%, down from to 34.7% in 2011 and 37.1% in 2010. Few telecommunication services and utilities companies report foreign data, and it is generally accepted that their sales are predominantly domestic (with some exceptions).

It would be helpful if there were current legislative or policy proposals to require reporting, but there aren’t. Compounding the issue, companies often prefer not to report the actual values. From an investor perspective, it would be beneficial to be able to create a matrix based on production and sales that accounts for parts made in China, assembled in Europe and sold in the U.K., with profits translated into U.S. dollar. Investors could then fill in the currency rates and see the income impact. Our editorial: unfortunately, don’t count on it. For now, we’re using 46.6% as a holding position for foreign sales as a percentage of total S&P 500 sales, and assuming that over half of pre-tax operating earnings hail from abroad.
We will release a full foreign sales report in August, which interested parties can find on our website:



NEW$ & VIEW$ (15 JULY 2013)


Market watchers have marvelled at the relative ease by which the U.S. economy has been absorbing the negative impact of the Sequester so far this year. Perhaps the big test is still to come. According to the latest budget data, the federal government achieved a surplus for the second time in three months. As today’s Hot Chart shows, the balance shows an excess of $100 billion over that period – the biggest since 2007.

The big difference between the April and June surpluses, however, is how they were achieved. In June, it was all about a reduction in spending outlays. As shown, net government outlays fell precipitously to their lowest level since 2003 in June. In fact, the 49% drop between May and June was the biggest drop since at least 1954 for this time of the year. The Sequester is biting and the teeth marks will show on Q3 GDP. (NBF Financial)


ISI’s company surveys, and particularly their diffusion index, have turned down. “Slower results at homebuilders, auto dealers, and shopping guides were the primary reasons for the deceleration.”

Goods Disinflation Reappears, but Shouldn’t Worry Fed The latest readings on producer prices and import prices show disinflation has not disappeared when it comes to goods.

The core PPI, which excludes food and energy, rose 0.2%. Yearly core inflation at the factory gate has held at just 1.7% for the past four months, compared with 2.6% in June 2012.

Meanwhile, foreign-made goods are becoming cheaper. Import prices excluding oil fell 0.3% in June, the fourth consecutive decline. Nonoil import prices are down 1.0% compared to a year ago. In June 2012, those prices were rising at a 0.6% annual rate.

Pointing up  Glitches Pump Up Gasoline Futures

August reformulated gasoline blendstock, or RBOB, settled 9.61 cents, or 3.2%, higher at $3.1175 a gallon on the New York Mercantile Exchange, the highest settlement for the contract since March 18. Analysts say the rally likely portends higher prices at the pump in the coming weeks.

Despite the recent rally, the U.S. is brimming with spare gasoline, due largely to weak demand. U.S. gasoline inventories now stand at 221 million barrels, their highest level for this time of year since 2001, according to the Energy Information Administration. However, supplies have fallen in recent weeks, whittling down the sizeable surplus.

Already, pump prices have been rising. On Friday, they rose 3.2 cents a gallon to average $3.55 a gallon nationwide, according to auto club AAA. That’s the biggest one-day rise in five months and comes on the heels of this week’s steep rise in oil prices. Mr. Lipow on Friday estimated that pump prices could rise another 10 cents a gallon over the next seven to 10 days.

Well, according to, gas is now $3.62/g. The last time WTI was $105, gas prices nearly hit $4.00. In fact, crude is now 6% above its summer 2012 peak of $99 but gas prices are 5% lower.image

That’s because Brent remains below its year ago level. But for how long?



Control retail sales (sales excluding autos, gasoline and building material stores, i.e. the portion of retail sales that goes directly into GDP consumption calculations) cratered last year when gas prices spiked from $3.40 to $3.85.



Also consider these recent revisions, not incorporated in the above chart:

Nominal personal consumption expenditure increased by 0.3% m-o-m in May, in line with consensus expectations. In real terms, consumer spending inched up by a relatively healthy 0.2%. However, the 0.1% monthly rise published initially for April was revised to a 0.1% drop. And this came in addition to the sharp downward revision for Q1 that was published in late June as a part of the GDP report. (Pictet)



The end result is quite spectacular and shows that consumption growth is on a softer trend than previously thought. Growth in consumer spending in Q1 was revised from 3.4% to 2.6% earlier this week and, with yesterday’s data in hand, we can now calculate that it settled at a soft 1.4% annualised between Q1 and April- May, whereas before the more recent data were published, the pace of increase in consumption between Q1 and April had been measured at 2.3% annualised.

Hmmm…The revised consumption data are a better reflection of the tight financial conditions of the average American following the expiry of the payroll tax cuts.


Too bad my fishing season is over!

Embarrassed smile  Restaurants Shift to Part-Time

U.S. restaurants added jobs at a much higher pace in the spring, but many say they are replacing full-time jobs with part-time positions, concerned about the new health-care law.

Restaurants and bars have been adding an average of 50,000 jobs monthly since April—about double the rate from 2012. (…)  Overall, leisure-and-hospitality establishments hired more workers than any other industry in June, accounting for 75,000 of the 195,000 jobs added last month, according to the most recent Labor Department report (…).

Views differ on exactly what is driving the hospitality industry’s pickup. (…) But a number of restaurants and other low-wage employers say they are increasing their staffs by hiring more part-time workers to reduce reliance on full-timers before the health-care law takes effect. (…)

For the entire U.S. workforce, employers have added far more part-time employees in 2013—averaging 93,000 a month, seasonally adjusted—than full-time workers, which have averaged 22,000. Last year the reverse was true, with employers adding 31,000 part-time workers monthly, compared with 171,000 full-time ones.

The Affordable Care Act requires employers with 50 or more full-time equivalent workers to offer affordable insurance to employees working 30 or more hours a week or face fines. Some companies have said the requirement could increase their costs significantly, although others have played down the potential hit. (…)

The administration says the law ultimately will help businesses by allowing them to pool risk with other smaller businesses in order to get more competitive rates. (…)

Well, business owners are voting with there feet now, never mind the “ultimate help” from the ACA. The delay announced won’t change the trend. Companies only got a full year to learn to operate with more part-timers.

Banks Are Cautious Even as Profits Rise

J.P. Morgan and Wells Fargo, two of the nation’s largest banks reported better-than-expected profits, but warned that mortgage lending could drop if interest rates stay elevated.

[image]The results from J.P. Morgan Chase & Co. and Wells Fargo & Co. show how even the biggest banks are struggling to overcome lackluster loan demand, a sluggish U.S. economy and a slew of new regulations that are crimping profits.

[image]Both banks exceeded Wall Street estimates, largely because they are scaling back the amount of money they have set aside to cover future losses. Net interest income–the revenue generated from the bank’s loans and other assets, minus their costs–was down at both banks.

J.P. Morgan reported net income of $6.5 billion, or $1.60 a share, versus $4.96 billion, or $1.21 a share, a year earlier. Revenue on a managed basis, which excludes the impact of credit-card securitizations, jumped 13% to $26 billion, beating the estimates of analysts polled by Thomson Reuters.

Wells Fargo reported net income of $5.52 billion, compared with year-earlier income of $4.62 billion. Per-share earnings were 98 cents versus 82 cents a year earlier. Revenue was roughly flat at $21.38 billion. Analysts polled by Thomson Reuters expected per-share earnings of 93 cents on revenue of $21.22 billion. (…)

J.P. Morgan Chief Financial Officer Marianne Lake told analysts Friday that mortgage refinance volumes could drop substantially if interest rates remain unchanged or rise, saying “the market could be reduced by an estimated 30% to 40%” during the second half of the year.

For the second quarter, J.P. Morgan’s mortgage income dipped 14% compared with the same quarter a year earlier.

Wells Fargo Chief Financial Officer Timothy Sloan also warned that refinancings of existing mortgages will decline. Mortgage banking income at the San Francisco lender decreased 3% from the year-ago period. Wells Fargo has a 22% share of U.S. mortgage originations, more than any other lender. (…)

Both banks highlighted several positive signals from consumers and businesses. Average loan balances in J.P. Morgan’s commercial banking unit were $131.6 billion, up 11% from a year earlier and up about 2% from the prior quarter, indicating companies are taking on more credit to fund inventory. Commercial banking recorded a profit of $621 million, down 8% from a year earlier but up 4% from the first quarter.

At Wells Fargo total loans were up 6% amid stronger demand for certain types of loans, specifically in auto loans and credit card growth. Auto-loan originations, for example, were up 9% from the year earlier period to $7.1 billion. Credit card balances were up 9% from the year earlier period. (…)

Change That J.P. Morgan, Wells Can Believe In

Quarterly results from the two big banks show a silver lining to the shift upward in interest rates.

(…) the move higher in rates should take some pressure off net-interest margins. J.P. Morgan said its margin declined to 2.2% from 2.37% the prior quarter, driven in part by higher cash balances. The bank expects the margin to be flat in the second half, though.

And higher rates should, eventually, benefit both the margin and net-interest income. At J.P. Morgan, the rise since May in the 10-year Treasury yield to levels above 2.5% should add about $700 million to net-interest income in 2014.

The benefit would be even greater if rates on shorter-dated instruments also were to rise. But even small gains help. J.P. Morgan has seen its core net-interest income, which came in at $9.5 billion in the second quarter, fall in five of the past six quarters.

The biggest potential benefit of rising rates, albeit one that may take time to materialize, is if they are accurately reflecting an improved economic outlook that translates into loan growth.

J.P. Morgan, Wells and other banks are well-positioned to take advantage of that, given continued increases in deposits. This, coupled with the continued reluctance of companies and consumers to borrow more, has led net loan-to-deposit ratios to keep falling. At J.P. Morgan, this was 59% in the second quarter, compared with 63% a year earlier; at Wells, the ratio fell to 77% from nearly 82%.

US banks: loan strangers
Without lending more, JPMorgan has increased deposits by about 10%

(…) While loan growth has been lacklustre at JPMorgan, it and its rival have increased deposits by about 10 per cent each during the past year. If the economy continues to strengthen and consumers gain confidence, demand for loans should improve, allowing these banks to deploy some of that cash at improving rates. Even if that remains some time off, there is hope that reserve releases can continue to boost the bottom line. The risk is that a jump in interest rates throws borrowers back into duress or squelches the housing market. But if rates rise gently with the economy, it could be a pretty good time to be a bank again.

Here’s the chart courtesy of ZeroHedge:



Chinese economy slows to 7.5% growth
Government at risk of missing target for 2013

(…) Virtually every dimension of the Chinese economy registered weaker performance in the second quarter. Industrial output edged down to 8.9 per cent growth year on year in June, from 9.3 per cent in May. Fixed-asset investment slowed to 20.1 per cent growth in year-to-date terms, from 20.6 per cent in May. Exports fell in June for the first time in more than a year. (…)

Quarter-on-quarter growth edged up from 1.6 per cent in the first three months of the year to 1.7 per cent in the second quarter. Retail sales staged a small rebound, climbing to 13.3 per cent growth year on year in June, from 12.8 per cent in May, though they remained well below last year’s pace for the first half as a whole.

A breakdown of the overall growth numbers also showed differing fortunes for different parts of the economy. The services sector expanded 8.3 per cent, while the industrial sector grew 7.6 per cent. (…)

China GDP(FT Data)

From the WSJ:

The deceleration is particularly hard on commodities producers—the biggest beneficiaries of China’s boom. A Standard & Poor’s study of more than 90 of China’s biggest companies found they will cut total capital expenditures this year for the first time in at least a decade. Investments in factories, assembly lines, smelters and telecommunications links tend to create big demand for raw materials that China imports.

China Is Slow and Unbalanced

The payoff for slower growth in China is meant to be a more balanced economy with consumption playing a greater role. So far, though, China’s economy is stuttering without much sign of the hoped for rebalancing.

(…) But the consumption picture is less rosy than June’s data suggest. For starters, the top-line retail sales figure was mostly boosted by higher prices, not more consumption. Moreover, retail-sales growth of 12.7% in the first half of 2013 is actually down from 15.2% growth for all of last year. The National Bureau of Statistics estimates that consumption accounted for 45.2% of GDP growth in the first half of 2013, compared with 51.8% in 2012. In other words, the economy’s not only slowing, it is also getting more off-kilter.

There are good reasons for this. In particular, household-income growth is slowing along with the broader economy. Urban disposable income in China rose 6.5% in the first half, down from 9.6% in 2012.

Beijing’s efforts to get China spending will take much more time. Public pensions and health-insurance benefits remain too low to persuade people to reduce rainy-day savings. The government has promised to increase returns on bank deposits and loosen restrictions on the capacity of migrant workers to access social welfare in cities, but so far, this is mostly policy hot air rather than concrete action.

Meanwhile, China has now recorded five straight quarters of growth below the 8% level the country’s previous leaders set as their unofficial minimum acceptable growth rate for the economy. So far, the new leadership is holding firm on its plan to let growth slow if it benefits the country in the long run. But the shift to a more consumption-led economy seems some way off.

China GDP components

(FT Data)

China Real-Estate Sector Posts Strong Growth

Total property investment in China in the first half of the year rose 20.3% compared with a year earlier to 3.68 trillion yuan ($599.3 billion), according to data released on Monday by the National Bureau of Statistics. That is marginally slower than the 20.6% growth in the first five months of the year.

The statistics bureau doesn’t give data for individual months. Confused smile

Residential and commercial property sales totaled 3.34 trillion yuan in the January-June period, up 43.2% over a year earlier. Sales totaled 2.59 trillion yuan in the five months ended May, up 52.8%.

Construction starts by area in the first half rose 3.8% from a year earlier to 959.01 million square meters. They were up 1% at 736.13 million square meters in the January-May period.

Chinese export downturn accelerates

Trade data provided further signs that China’s economic slowdown gathered pace in June. Official data confirmed signals from the PMI surveys that exports are falling, while a drop in imports also indicated that domestic demand is weakening.

Official trade data showed exports down 3.1% on a year ago in June. That compared with a 1.0% rise in May and was the worst reading since October 2009. The deterioration in the official data comes after Markit’s HSBC manufacturing PMI data showed exports to have fallen for a third successive month in June, dropping at the fastest rate since March 2009.

The trade data also showed imports down 0.7% on a year ago in June after a 0.3% decline in May. These were the first back-to-back declines since October 2009. Falling imports are an indication that demand
has weakened in the domestic economy of mainland China. This corresponds with PMI data which showed the domestic-oriented services economy going through a soft-patch, with new business growth more or less stalling, registering the weakest growth since the services PMI survey was started in late-2005.



Pointing up By the way, here’s the most reliable chart on China, courtesy of Pictet:

The Li Keqiang index, a proxy for GDP growth based on three components (railway freight, bank loans and electricity consumption) shows the Chinese economy is now running close to 6% growth compared to the official 7.5% GDP growth target for 2013.


On today’s Q2 GDP numbers, you may want to read FT Alphaville’s post on the “numbers” (Some observations and oddities in China’s Q2 GDP). I find this part most interesting:

(…) nominal GDP growth decelerated much more sharply from 9.6% in Q1 to 8%, as the deflator increased just 0.5% yoy (1.7% yoy in Q1). We find this deflator somewhat too low given the monthly inflation data published over the quarter. In comparison, Q4 2009 had much lower CPI, similar PPI, lower export price inflation and higher import price inflation, but yet the GDP deflator was significantly higher at 1.4% yoy.

Pictet not only has good charts, it also has good wisdom:

The Chinese equity market has corrected sharply down, and is now trading at 7.8 forward P/E which corresponds to 1.5 standard deviation below the longterm average. China is now one of the cheapest markets in Asia ex Japan. The worst of the impact on corporates in the form of increased financing costs in a context of slower growth is yet to come. In this context, we do not see any significant short term catalyst for the Chinese equity market, which remains unattractive.

The Chinese authorities will remain committed to preventing defaults in the financial sector and a risky sharp deleveraging in the corporate sector which means it is unlikely the government can boost the economy. China’s economy has become more vulnerable. The unremitting slowdown in growth reveals how China’s economic model has been running out of steam just when the proliferation of ‘shadow banking’ in the country is heightening the vulnerability of the financial system as a whole.

A positive outcome for the Chinese economy is that the government may stick to its “no stimulus” approach while adopting more prudent monetary policy which would allow for an orderly deleveraging. More importantly, it could also pave the way for the structural reforms China needs to transition towards an exports-driven economic model that is less reliant on investment and more sustainable.

The FT Lex column is also not short on wisdom:

Granted Chinese companies look cheap. Three of China’s big four banks, which make up over a sixth of the weight of the Hang Seng index by market capitalisation, trade below book value. Bank of China now trades at 0.7 times book. But like China’s GDP figures, book values could be revised down many times yet.

GOOD READ: Asia Is Reaching a Turning Point by Blackstone’s Byron Wein:

I spent almost two weeks in Asia in June and in some ways it was an eye-opener.  In past years there was a sense of optimism everywhere you went.  Now you get a feeling of uncertainty touched by apprehension. (…)

E-Zone IP Dips in May

Eurozone manufacturing production in May fell by 0.4% after rising by 1% in April. The output of consumer durables fell sharply, by 2.3%, posting a second drop in a row, a drop of 1.9%. Capital goods output fell by 1.5% in May. That reversed a stronger 2.5% increase in April. Nondurables output rose by 0.6%, rising for the second month in a row. Intermediate goods output accelerated its continuing modest advance rising by 0.4% in May.

Fingers crossed  Despite the setback in May manufacturing output is on an accelerating path. After falling 1.6% over 12 months it is expanding at a 2.6% annual rate over six months and at a 3.7% annual rate over three.

Sad smile  Business Confidence Declines in Survey

Businesses around the world became more gloomy about their prospects in June, an indication that they are unlikely to increase their investment spending and hiring.

Of 11,000 manufacturers and services providers in 17 countries surveyed between June 12 and 26, the proportion expecting an increase in activity over the coming 12 months exceeded the proportion expecting a decline by 30 percentage points—down from 39 percentage points in February, data-analysis firm Markit said. (…)

Markit said the decline in business confidence was most notable in the U.S. and China, with smaller declines recorded in the euro zone and Japan.

“The deterioration in business optimism in the U.S. suggests the pace of economic growth is slowing sharply compared to that seen earlier in the year and calls into question the ability of the economy to continue generating jobs at anything like the pace seen in recent months,” said Chris Williamson, chief economist at Markit. “Any thoughts of an imminent tapering of the Fed’s stimulus are looking premature on this basis.” (…)

Within the euro zone, Markit said there were signs of rising business optimism in some countries that have been at the forefront of the currency area’s fiscal and banking crises, notably Spain and Ireland. But it said confidence was low in Germany and France, the two largest national economies to use the euro.

Red heart  GOOD READ # 2: Actually, a MUST READ: Neils Jensen’ Much Ado about Nothing


Factset notes that:

Of the 30 companies that have reported earnings to date for the quarter, 73% have reported earnings above estimates. This percentage is equal to the average of 73% recorded over the past four years. However, only 47% of companies have reported sales above estimates. This percentage is well below the average of 58% recorded over the past four years. If 47% is the final percentage, it will mark the fourth time in the last five quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The blended earnings growth rate for the S&P 500 overall for Q2 2013 is 0.6% this week, slightly above last week’s growth rate of 0.5%. Upside earnings surprises reported by JPMorgan Chase (+11%) and Wells Fargo (+6%) more than offset small downward revisions to estimates for companies in the Energy sector during the week.

Be aware that 70 S&P 500 companies will report this week. Based on the JPM and WFC beats, the tone should be positive:

The Financials sector will be a focus sector for the market during the upcoming week because the sector has the most companies (22) scheduled to release earnings and because the sector is reporting the highest earnings growth of all ten sectors at 18.7%. The sector is reporting a year-over-year increase in earnings of $7.5 billion ($47.8 billion for Q2 2013 compared to $40.2 billion in Q2 2012) for the quarter.

Laughing out loud  INVESTING IS GETTING SIMPLER! (Click to enlarge). Via Greed & Fear (Tks Gary).



NEW$ & VIEW$ (8 JULY 2013)

Job Gains Show Staying Power The U.S. job market chalked up solid progress in June, bolstering evidence that the economy might be strong enough to grow with less help from the Federal Reserve and sending bond investors rushing to sell.

American employers added 195,000 jobs in June, the Labor Department said Friday, and tallies for April and May climbed by a combined 70,000.



Revisions are almost always up!



Job creation is still concentrated in the low-income, low wage industries. During June, 121,600 of the 195,000 jobs created (or 62 percent) were in leisure & hospitality (75,000), retail (37,100), and temporary worker (9,500) industries. It isn’t easy to get the economy going with jobs growth relatively isolated to these low-wage sectors. Overall, average hourly earnings increased just 0.4 percent in June, 2.2 percent from year ago levels. Once adjusted for the mild inflation of about 1.5 percent, real earnings are advancing at about a 1 percent pace. (Bloomberg)

Construction companies added 13,000 jobs, the most in three months, while automakers boosted employment by 5,100 workers, the biggest gain in four months. Hiring at auto dealerships and home-improvement stores also picked up, the report showed.

Factories reduced payrolls by 6,000 in June.

Doug Short illustrates the consumer earnings trends:


The next chart applies some simple math to the two data series. Let’s create a snapshot of hypothetical expected real annual earnings: multiply Real Average Hourly Earnings times the Average Hours Per Week and then multiply the weekly earnings times 50 (yes, a couple of weeks of unpaid vacation).



Some Troubling Signs In June’s Jobs Report  The latest June jobs report isn’t quite all roses.

Behind the solid payroll gains are a few troubling signs. The number of Americans working part-time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped last month.

As a result, a broader measure of unemployment increased a half percentage point in June to 14.3%. That’s the highest level since February and the largest monthly increase since 2009 in that rate, known as the “U-6,″ for its data classification by the Labor Department. (…)

The number of workers employed part-time because they couldn’t find a full-time job increased by a seasonally adjusted 322,000 last month. There were 1 million so-called discouraged workers in June, those who say they are not currently looking for work because they believe no jobs are available for them. That’s an increase of more than 200,000 from a year ago. (…)

Prime-Age workers remain jobless:

To get a cleaner read of trends in job opportunities we look at the EPOP after removing young people and people near or above retirement age. As the figure below shows, the employment-to-population ratio of “prime-age” workers—workers age 25–54—dropped from over 80 percent in early 2007 to 74.8 percent at the end of 2009, and has since increased to 75.9 percent. In other words, we are four years into the recovery, and we have climbed only about one-fifth of the way out of the hole left by the Great Recession. (Heidi Shierholz at the Economic Policy Institute)

 Annoyed  Jobs Strength Keeps Fed on Track

The Labor Department’s strong June employment report improved the odds the Fed will begin to pull back on its $85 billion-per-month bond-buying program by the end of the year.

The Labor Department said U.S. employers have added more than 200,000 jobs per month over the past six months, hitting a benchmark some Fed officials have cited as an indication of the kind of economic progress they want to see before shrinking their bond purchases.

But the market is not waiting for the Fed:

“The Fed has made clear that at the end of the day it is employment which will call the tune,” Mr. Feroli said. “Coming into today, our call for a December first taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting.”

The Atlanta Fed’s “Jobs Calculator” says if the economy can add an average of 180,000 jobs per month, that 7% jobless mark could be hit in a year’s time, all other labor force factors being equal.

Rising long-term rates are not without consequences:

Incidentally, ISI’s homebuilders’ survey has been wakening in recent weeks.

And the PMIs:


And this big danger:




Office Recovery Stays Slow

The U.S. office market continued its slow-but-steady recovery in the second quarter, as employers took on additional space at a modestly improved pace compared with recent anemic levels.

The amount of office space occupied by employers increased by 7.2 million square feet, or 0.2% of the total occupied stock, during the quarter, according to real-estate research service Reis Inc. That was the biggest increase since the economy began slowing in 2007.

But the pickup still was below levels seen in more typical periods of economic growth. During such times, the volume of occupied space can increase some 10 million to 20 million square feet per quarter. In contrast, employers have generally taken on between three million and five million square feet of additional space per quarter since the market began improving in 2011.

Without faster growth, the office-vacancy rate is likely to continue to stay high—and rents relatively low. In the second quarter, the overall U.S. vacancy rate stayed flat at 17%, down from a postrecession peak of 17.6% reached in mid-2010.

Rents sought by landlords ticked up to $28.78 per square foot in the second quarter, from $28.66 per square foot in the first quarter and $28.18 one year earlier, according to Reis, which tracks 79 metropolitan areas.

Ripple effects:

FT’s John Authers: ECB comes to the market’s rescue again

(…) Friday’s US jobs report, revealing the US labour market continued to show slightly greater strength than many expected, forced the message home. Despite much ongoing weakness in the US economy, if its labour market keeps improving like this, the chances are that the Fed stimulus will end next summer. In response, bond yields moved sharply upwards across the world. This may well have been what Mr Bernanke wanted, even if Fed colleagues later downplayed his remarks.

What is now beyond doubt is that the market went very far beyond anything the BoE or ECB could tolerate.

To counter rising rates, the ECB said it “expects the key rates to remain at present or lower levels for an extended period of time”, while the BoE’s new governor, Mark Carney, said “the implied rise” in future rates was “not warranted by the recent developments in the domestic economy”. In other words, the market had set gilt yields too high.

As a result, although the Fed is still buying bonds, while the ECB’s balance sheet is contracting, the extra yield on German Bunds compared to US Treasury bonds reached its highest since the crisis.

There is irony here. When the Fed launched its programme of bond purchases in early 2009 – arguably a form of printing money – the rest of the world complained that it was fighting “currency wars”. Low US rates made for a weak dollar, and cheaper US exports. The response was for other countries to cut their rates. In effect, the Fed exported its low interest rates. Now the problem has reversed. The Fed is exporting higher rates, and the ECB and BoE have been forced to be more lenient.

There is one safe bet out of this, which is prolonged weakness for sterling and the euro, already near their lows for the year. When their central banks appear so much more dovish than the Fed, this can only weaken them against the dollar.

A second, slightly less safe bet is on European equities. Easy money is good for stocks, and these announcements will prop up stock markets which in Europe have been anaemic. (…)

While European stocks enjoy support from their central banks, it is a bad idea to bet against them. But in the longer term, the reasons for concern about the eurozone and UK are not going away. That they share the world with a Fed that is talking up rates only adds to the hazards.

Canada Jobs Little Changed in June After May’s Huge Gain

Employment fell by 400 last month after May’s surge of 95,000 while the jobless rate was unchanged at 7.1 percent, Statistics Canada said today in Ottawa. (…)

Canada’s job gains have slowed so far this year, with the average monthly gain of 14,000 less than the 27,000 recorded in the second half of last year, Statistics Canada said.

Full-time employment fell by 32,400 in June, following a 76,700 gain the prior month. Part-time positions rose by 32,200, Statistics Canada said.

Private companies cut 5,300 workers last month after May’s 94,600 increase, while public-sector employment rose by 1,000.

Meanwhile, in the Eurozone

German Industrial Production Decreased in May

Production fell 1 percent from April, when it gained a revised 2 percent, the Economy Ministry in Berlin said today. That’s the first decline since January. From a year earlier, production decreased 1 percent when adjusted for working days.

Orders are also falling:

German Factory Orders Drop as Euro-Area Economy Struggles

Orders, adjusted for seasonal swings and inflation, dropped 1.3 percent from April, when they fell a revised 2.2 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 1.2 percent, according to the median of 42 estimates in a Bloomberg News survey. Orders slid 2 percent from a year ago, when adjusted for the number of working days.

Germany’s domestic orders declined 2 percent in May from the prior month, today’s report showed. Overseas demand shrank 0.7 percent, with orders from the euro area slumping 3.9 percent. Orders for basic goods fell 0.1 percent from April, while investment-goods orders slid 1.8 percent. Demand for consumer goods dropped 3.1 percent, with orders from the euro area down 5.7 percent.

The FT adds:

This follows a weak 48.6 in June’s manufacturing PMI survey. Economists at Markit said: “There’s a lack of demand both at home and in export markets, so stagnation seems to be the best that we can expect for the time being.”

Sweden’s IP fell 2.6% in May MoM, after dropping 1.1% in April. Turkey’s IP fell 0.6% in May MoM, following a 1.4% rise in April.

French Firms Cut Back on Investments

Despite low interest rates, French companies and entrepreneurs are cutting back on their investments. They’re delaying plans to expand existing factories, and canceling plans to build new ones.

[image]Higher taxes and cheaper foreign competition have pushed margins for French companies down to their lowest level since 1985—reducing companies’ ability to stomach risk. At the same time, French business leaders say the challenges from unpredictable tax rates and ever-changing French red tape are rising. (…)

Investment by nonfinancial companies in the euro-zone’s second-largest economy has contracted every quarter since the beginning of 2012. A recent survey by French statistics agency Insee showed French businesses in manufacturing expect to cut investment by 4% this year, while in January they expected to keep investment at the same level as 2012.

France isn’t alone in seeing shrinking private investment as the recession across much of Europe pushes businesses from Germany to Greece to tighten their purse strings. But economists say the decline is particularly worrying in France because of the lower profitability of French companies. For nonfinancial corporations in France, gross profit share—a standardized measure of profit margins—stood at 25.7% at the end of last year, compared with 35.2% on average in the euro zone, according to data from European the statistical agency Eurostat.

Greece’s Economic Future ‘Uncertain’

Hours before a euro-zone finance ministers’ meeting to approve the disbursement of aid to Greece, the technocrats overseeing its bailout said the country’s economic outlook remained cloudy

CEBM Research latest survey:

Industrial demand has remained weak during the traditional off-season with few bright spots among industrial sectors. Additionally, the recent liquidity squeeze in the interbank market has led to higher financing costs, worsening cash flows and higher credit risks among small and medium sized enterprises (SMEs).

In detail, a number of industrial sectors surveyed by CEBM did not achieve their sales targets during the month of June. Cement demand declined due to the upcoming off season, and actual sales were weaker than expectations. Steelmakers and machinery sales showed no improvement due to the off season. Auto sales, which have been quite robust over the past few months, decreased in June and were below seasonal trends, partially due to tightening credit conditions for car loans. Property sales were stronger than expectations but mostly due to lowered sentiment among property developers.

The most significant change during the course of June was of course the liquidity squeeze in the interbank market, which has expanded to enterprises and has led to higher financing costs, tightening cash flow, and increasing risk of default on debts. Current bill financing rates increased to an annualized cost of around 10-12% for enterprises, leading to significant pressure on their profitability and short term cash flow. A few cement producers and metal traders reported that they received a lot more commercial bills than they did previously, in addition to the rapid increase of other receivables. Many banks surveyed by CEBM are now concerned about the potential outburst of credit risks among SMEs, particularly those located in the Yangtze delta area. (…)

Consumer sector performance in June showed signals of further decline. Respondents in department stores, home appliance retailers, and supermarkets all reported weaker sales growth (Y/Y). Performance of restaurants further diverged.

Japan bank lending hits four-year high
Loan growth suggests stimulus is spurring fund demand

Outstanding loans held by Japanese banks rose 1.9 per cent in June from a year earlier, Bank of Japan data showed on Monday, marking the 20th straight month of increase and posting the biggest gain since July 2009.


Global Earnings Downgrades Worst In 12 Months

As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012.

But not in America:

Analysts Boost S&P 500 Target 11%, Lower Earnings Growth

The same equity analysts who lowered second-quarter profit growth predictions to almost nothing in 2013 are raising price forecasts, convinced the economy is growing fast enough to lure more investors and boost valuations.

Standard & Poor’s 500 Index earnings rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg. At the same time, share-price targets for companies are rising at the fastest rate in two years. The U.S. equity gauge will increase 8.9 percent to a record 1,777.91 should the forecasts prove accurate. (…)

Analysts are looking past profit growth this year and predicting improving investor sentiment will push stocks higher. They’ve boosted price estimates for the S&P 500 by 11 percent from 1,608.50 on Dec. 28, the fastest rate since July 2011, according to data compiled by Bloomberg.

U.S. equity volume, in retreat since 2009, is showing signs of picking up. Trading on all American markets has averaged 6.77 billion shares a day since the start of June, compared with 6.35 billion between January and May and 6.42 billion in 2012, according to data compiled by Bloomberg.

Well, if earnings are not cooperating, P/Es ought to rise! Why? “Improving sentiment”!”

What about rising interest rates…The same people calling for higher rates are calling for higher P/Es.


Fingers crossed Fingers crossed Maybe this might help:

A Turn in Economic Indicators