NEW$ & VIEW$ (2 JULY 2013)

U.S. Factories Buck Global Growth Slowdown

The Institute for Supply Management on Monday said its broad index, in which any reading above 50 indicates expansion, rose to 50.9 last month from 49 in May. The report showed growth in new orders, production and inventories. However, in a potentially troubling sign for Friday’s jobs report, the employment index contracted for the first time since September 2009.



The JPMorgan Global Manufacturing PMI, produced by Markit from its worldwide business surveys, was unchanged at 50.6 in June. At a level close to the nochange mark of 50, the index signalled a continuation of the near-stagnant trend recorded throughout the first half of the year.


While the near-stagnation is an improvement on the mild rate of decline seen throughout much of the second half of last year, the survey data indicate that the underlying trend in the global manufacturing economy remains well below the trend rate of approximately 5% per annum seen in the years leading up to the financial crisis, growing instead at an annual rate of just 1-2%.

imageHowever, the unchanged reading masks diverging manufacturing performances by country, with the top of the manufacturing PMI rankings dominated by developed countries.

The top of the table was in fact dominated by developed countries, with the UK followed closely by Japan, where the PMI came in at 52.3 and signalled the fastest rate of improvement since February 2011. Meanwhile, the Markit US PMI dipped to an eight month low, which was in turn linked to the steepest drop in export orders for four years. The US
nevertheless ranked third in the PMI rankings. Part of the global export weakness reflected theongoing recession in the eurozone. However,  although euro countries continued to dominate the lower end of the PMI rankings, the single-currency area’s manufacturing PMI rose to 48.8 in June, indicating that the region is contracting at the slowest rate for 16
months. Output and new orders more or less stabilised, following big improvements in the survey data for Spain, Italy and France in recent months, and offsetting a slight deterioration in the German survey numbers.

In Asia, the ongoing improvement in the Japanese PMI, linked to rising domestic and export orders, contrasted with the PMI for China hitting a nine-month low of 48.2.

The increased rate of decline in China came as the country’s manufacturers reported the steepest monthly fall in export orders for four years. China sank to third from the bottom of the PMI ranking table as a result. Taiwan’s manufacturing sector meanwhile contracted for a second successive month, the PMI at 49.5, while the PMI for South Korea also dipped below the 50-line for the first time in five months with a reading of 49.4. At 46.4, the PMI for Vietnam registered the steepest
downturn for almost a year, and at 51.0 the PMI indicated the weakest expansion for four months in Indonesia. Of all the countries surveyed in June, the scale of the downturn seen in Vietnam was only exceeded by that recorded in Greece.

In India, the PMI ticked higher to 50.3, but nevertheless indicated the second-weakest expansion for over four years as orders fell for the first time since March 2009.

Elsewhere, the PMI for Mexico fell to 51.3, its lowest since data collection began in early-2011, and Brazil’s PMI was unchanged on May’s seven-month low of 50.4, with weakness fuelled in both bases by increased
rates of decline of exports. Russia bucked the deteriorating trend seen in other emerging markets, with rising domestic orders helping push the PMI to a four-month high of 51.7.


(Business Insider)

Air freight market struggled to grow in May: IATA

The international air freight market grew by a mere 0.1 percent in May compared to April, and was up 0.8 percent from May 2012, as slowing business confidence and weaker Asian trade undermined cargo demand, the International Air Transport Association (IATA) said on Tuesday.

Construction Spending Hits 3½-Year High

Total U.S. construction spending rose by 0.5% in May from the prior month to a seasonally adjusted annual rate of $874.9 billion, the Commerce Department said Monday. That was the highest level since September 2009.

The rise was driven by residential construction, which rose 1.2% from a month earlier and 22.7% from a year ago. Private residential construction, which excludes public housing, rose to the highest level since October 2008.

Meantime, spending on construction of public buildings—including, state, local and federal government structures—rose 1.8% in May from April, but was down 4.7% from a year ago.

Household Incomes Languish

Four years into recovery, parts of the economy have strengthened but real median household income remains below prerecession levels. The Household Income Index came in at 92.2 in May, below the 97 of June 2009, when the recession ended. It is also lower than the 98.8 reading seen in December 2007, when the recession began. In May, real median annual household income was $51,500.

Clouds Over Canada Damp Loonie

The Canadian dollar, also known as the “loonie,” has dropped 5% against the U.S. dollar since mid-May amid a broad downdraft in currencies of big commodity-exporting countries. On Friday, it hit its lowest level since October 2011. (…)

The combination of lower global commodity prices and nervousness about housing has become a drag on growth, which the Bank of Canada forecasts will slow to 1.5% this year from 1.8% in 2012.





China Home Prices Jumped in May

Housing prices in China’s 70 major cities in May registered their highest annual growth rate in more than two years, at 5.3%, which could increase pressure on cities to enforce the government’s property-cooling measures.

Average prices of newly built homes in China’s 70 major cities rose 5.3% in May compared with a year earlier, up from a 4.3% rise in April, according to calculations by The Wall Street Journal based on National Bureau of Statistics data. That is the highest reading since March 2011, when prices rose 5.3% as well. On a month-to-month basis, the increase in prices was 0.9%, the same as in April.

Prices rose in 69 cities in May compared with a year earlier, up from 68 cities in April. But there has been a moderation on a month-to-month basis, with prices of new homes in 65 of 70 cities rising in May from the month before, down from 67 cities in April.



Inside China’s Bank-Rate Missteps

A rare peek into the actions of China’s leaders in a month when a Chinese cash crunch spooked global investors shows a leadership falling short in its struggle to redirect China’s economy.

The People’s Bank of China instigated the cash shortages that catapulted Chinese interest rates to nosebleed highs during the past two weeks because the central bank felt it had no alternative amid what it saw as out-of-control credit growth, according to an internal document reviewed by The Wall Street Journal.

But by failing to make that clear—at a time when worries about slowing Chinese demand had already scared away some foreign capital, and as signals from the U.S. Federal Reserve also were redirecting global cash flows—the Chinese central bank inadvertently contributed to a surge in global market anxiety.

(…) Chinese leaders are blaming market speculation and what the authorities view as overly aggressive media coverage for the problems. Some critics, however, say the fault lies partly with clumsy maneuvering by the central bank and the senior officials who oversee it, saying it exposed their inexperience in anticipating how markets—domestic and foreign—would interpret their actions. (…)

According to a previously undisclosed summary of a PBOC internal meeting on June 19, the central bank was especially concerned that in the first 10 days of June, Chinese banks increased lending by 1 trillion yuan ($163 billion)—an amount the central bank said “had never been seen in history.” About 70% of that amount consisted of short-term notes that mostly don’t show up on banks’ balance sheets—making it easier for the banks to get around regulatory lending restrictions-—rather than lending the money to promising companies or projects.

The PBOC interpreted banks’ actions to mean that “some banks thought the government would launch stimulus policies as the economy slows, and positioned themselves in advance,” according to the summary. (…)

Spanish unemployment falls for fourth month Temporary hiring stepped up for holiday season

The number of Spaniards claiming unemployment benefits fell by more than 127,000 last month, a record drop for the month of June, as hotels and other businesses exposed to the holiday season stepped up temporary hiring.

Spain’s labour ministry said the number of registered unemployed now stood at 4.76m, down 2.6 per cent from the previous month. It was the fourth consecutive month that saw a drop in registered unemployment.

High five  However, economists warned that the drop in registered unemployment was likely to be a fleeting phenomenon – and that there was no sign yet of a genuine turnround in the labour market. Their case was bolstered by news that the seasonally adjusted number of registered unemployed in June rose by 996 to 4.88m. The number of workers on permanent contracts also fell compared with both the previous year and the month before, another sign that Spain has yet to enter a new phase of lasting job growth. (…)

The discrepancy between the registered employment data published monthly by the labour ministry and the more closely watched survey released by the statistics office has long been a topic of controversy in Spain. Experts say the difference is largely the result of the fact that many unemployed have little incentive to register with employment offices, for example because they are too young to claim benefits.



France, Spain, Italy Drag on Car Market

Europe’s car market is struggling to get out of reverse gear with sharp declines in new-car registrations in France, Spain and Italy in June.

In France, registrations fell 11% in the first half of the year, putting the proxy for new-vehicle sales on course for their lowest level since 1997.

The overall French market for passenger cars fell 9% in June from a year before. Adjusted for an equivalent number of working days, the year-over-year decline in June would have been 4.4%.

In Spain, new-car registrations slid 4.9% in the first half.

Italy saw a drop similar to that of France, with registrations down 10% at 731,203 units between January and June.



Germans Let Cars Age as Consumers Halt Buying in Crisis

Cars on German roads are older than they’ve ever been as consumers balk at replacing aging models with new ones amid Europe’s sovereign-debt crisis.

Registrations of new models in the country slumped 4.7 percent in June, the fifth decline this year, leading to an 8.1 percent drop for the first half of 2013 to 1.5 million vehicles, according to data released today from Germany’s motor vehicle office, KBA.

The lack of buying meant cars are 8.7 years old on average, a new high and a full year older than the pre-crisis level in 2007, the VDA, Germany’s auto-industry association, said today.

Maruti Posts Decline in Sales

Maruti Suzuki, the India’s largest car maker by sales, posted its sixth straight drop in monthly sales in June, as rising fuel prices and high loan rates continued to weigh on purchasing decisions by customers.

Total sales at Maruti fell 13% in June to 84,455 vehicles from 96,597 a year earlier. Sales in the local market dropped 7.8% to 77,002 vehicles, while exports plunged 43% to 453 vehicles.

Maruti—the biggest overseas unit of Japan’s Suzuki Motor Corp.–is considered the benchmark of the vitality of India’s car market as the company sells small cars, which comprise about three fourth of overall car sales in Asia’s third-biggest economy.

Revitalized Car Industry Cranks Up U.S. Exports

The U.S. auto industry, in tatters just four years ago, is emerging as an export powerhouse, driven by favorable exchange rates and labor costs in a trend experts say could drive business for many years.

(…) More competitive labor costs and restructurings that closed unproductive factories have made American auto plants tougher competitors in the global market. Some are also looking at U.S. production as a way to serve booming emerging markets. (…)

U.S.-made cars are being shipped to China, the world’s largest auto market, Saudi Arabia, the second largest destination for U.S.-made cars behind Germany, and South Korea, which now has a free-trade agreement with the U.S. (…)

Labor agreements paved the way for the two auto makers to hire thousands of workers who earn $14 an hour, about half that of veteran workers. Ford, which restructured without government intervention, got much the same terms from the United Auto Workers union as its crosstown rivals.

The leaner U.S. industry also contrasts with Europe and Japan, which are struggling with too much capacity, rising labor costs and shrinking domestic demand.

The average cost of a U.S. auto worker’s pay and benefits was $38 an hour in 2011, compared with $60 in Germany and $37 in Japan, according to the Center for Automotive Research. That’s up only $3 an hour from 2007. In Germany, the per-hour compensation has jumped $14 in the same period; in Japan, it is up $12. These trends have encouraged German and Japanese auto makers to boost exports from their U.S. factories. (…)

Forces Converge in Emerging Markets

Countries from Turkey to Brazil to China are getting hit by a brutal combination of events, as economies slow, investors pull out cash and protesters take to the streets—all fresh reminders that these markets can be difficult places to try to make money.



NEW$ & VIEW$ (6 JUNE 2013)

More Signals of Slumping Manufacturing

Apart from the volatile transportation sector, new orders for factory goods fell 0.1% in April, after falling 2.8% in March, the Commerce Department said Wednesday. Among the biggest slumps was demand for computers, which dropped more than 9%.

Overall orders for manufactured goods, which cover everything from farm machinery to carbonated sodas, rose $4.9 billion during the month, or 1.0%, to $474 billion from March. That reversed a 4.7% decline Confused smile in orders in March. April’s gains largely reflected higher demand in transportation; aircraft maker Boeing Co., for instance, increased orders during the month and likely boosted the overall figure.

The report offers evidence that factories are suffering amid weak demand from customers overseas, as Europe grapples with recession and parts of Asia slump, as well as weak demand in the U.S.

Pointing up  (…) business investment, as measured by new orders for non-defense capital goods excluding aircraft, rose at a weak pace of 1.2% to $67.51 billion, after rising 1.1% in March and falling 4.8% in February.

German Factory Orders Fall; Economy Struggles to Recover

Orders, adjusted for seasonal swings and inflation, decreased 2.3 percent from March, when they increased a revised 2.3 percent, the Economy Ministry in Berlin said today. Economists forecast a 1 percent drop, according to the median of 39 estimates in a Bloomberg News survey. In the year, workday-adjusted orders fell 0.4 percent. (…)

Domestic orders declined 3.2 percent in April, while foreign demand dropped 1.5 percent, with orders from the euro area down 3.6 percent, today’s report showed.

Higher Mortgage Rates Won’t Kill Housing Recovery

The Mortgage Bankers Association reported on Wednesday that rates jumped to 4.07% last week for the 30-year fixed-rate loan, up from 3.9% in the previous week. At the beginning of May, rates stood at 3.59%, according to the same MBA survey. (…)

What does it all mean for the housing market? Already, refinancing activity has fallen like a rock. (…)  Loan applications to refinance dropped 15% last week from the previous week and is at its lowest level since November 2011, according to the MBA.

Home buyers, however, will be less sensitive to rates than those seeking a refinance. A rule of thumb holds that every one percentage point increase in mortgage rates makes homes about 10% more expensive for buyers by increasing the monthly mortgage payment. The bottom line: if higher rates are here to stay, that could take some of the edge off of recent price increases.

There are two big reasons to suggest modest increases in rates won’t cause major damage for the housing market. First, all-cash purchases have accounted for a significant share of home sales in recent months. Second, housing is still extremely affordable — and mortgage rates, even at 4.07%, are lower than they have been at almost any time from the early 1950s until August 2011.

“Housing can remain affordable by historical standards even if interest rates rise,” wrote Goldman Sachs economists Hui Shan and Marty Young in a research note this week. (…)

Goldman runs an exercise that shows just how affordable housing is, even if rates rise. They assume the typical homebuyer has an annual household income of $50,000, pays a 20% down payment, and obtains a 30-year fixed-rate mortgage. At an interest rate of 3.8%, the average homebuyer can afford a house worth $279,000, which is 45% above the current median sales price of previously owned homes. Even if interest rates rise to 6%, homes would still be affordable to this median borrower because prices are still so low. (…)

Hmmm…So, why is the Fed spending all this money to keep rates low?

A similar analysis from  Trulia Inc., the online real-estate site, shows that homeownership still beats renting even if interest rates are higher. In March, the cost of owning a home was 44% cheaper than renting assuming a 3.5% mortgage rate. Buying would be 39% cheaper than renting with rates at 4.5%, and owning would be 33% cheaper at a 5.5% rate. (…)

Some analysts have also speculated that rising rates could boost housing demand in the immediate future. That seems less likely. True, rising rates could encourage people who were already looking for homes to pull the trigger now, rather than in a few months. But mortgage bankers say it’s unusual for truly undecided home shoppers to choose to purchase because of rising rates. “Rising rates induce anxiety,” says Lou Barnes, a mortgage banker in Boulder, Colo. (…)

Remember that all interest rates are currently artificially low, very low. Normalization would result in pretty quick and sharp increases. The Fed will try to smooth things out but that is easier said than done.

And, by the way, if median income households are akin to median net worth people, they are probably not very much inclined to buy a $279,000 house on a 20% down payment (chart from the National Bureau of Economic Research via FT Alphaville)

Drop Below 15000 Not Too Significant—Yet  The Dow fell below 15000 for the first time in a month. But the real number to watch for signs of a change in sentiment is the 50-day moving average.

The Dow recently fell 205 points to 14972; the 50-day moving average comes in at 14915.65. As we noted earlier, the S&P 500′s 50-day moving average is also in focus. That index is down 1.3% at 1610, with its 50-day average ringing in at 1604.


NEW$ & VIEW$ (4 JUNE 2013)

Sad smile  Weak Signs for Output

U.S. factories in May posted their worst month since the end of the recession, as weakness overseas overwhelmed a still-shaky manufacturing recovery at home.

(…) The ISM report showed weakness across the board, with current production declining, employment remaining stagnant, and new orders falling—an especially worrisome sign because it provides little hope for improvement in the months ahead. Brad Holcomb, chairman of the ISM’s manufacturing-survey panel, flagged the decline in new orders as particularly troubling. “I don’t recall the last time” more industries saw declines in new orders than growth, he said.


“It’s not a glitch,” John Silvia, chief economist at Wells Fargo, said of Monday’s report. “It suggests that there is a more fundamental slowdown in the U.S. economy.”

Mr. Silvia estimates economic growth, as measured by gross domestic product, has slowed to 1.2% in the second quarter, from an already tepid 2.4% rate in the first three months of the year. (…)

Surprised smile  SURPRISE ISM

That report pushed the Citigroup U.S. Economic Surprise Index to its second-lowest reading since early February. The index — which measures the degree to which economists’ consensus estimates have been too optimistic or pessimistic about data releases – fell to negative-22.6. It has been in negative territory for all but two trading days since mid-April. (…)

It’s not just manufacturing data that have been weak. Jobless claims have risen in three of the past four weeks, economic growth during the first quarter was revised lower last week and inflation has slowed to a near standstill.

Auto  U.S. Car Sales Signal Plateau

Overall, consumers and businesses bought vehicles at an annualized rate of 15.3 million vehicles, according to researcher Autodata Corp., the fourth month this year that sales have exceeded a 15 million vehicle pace. However, May’s sales pace was only slightly above the average for the first five months of 2013.

In anticipation of another strong year, U.S. car makers are limiting their traditional summer shutdown to keep cranking out cars. Ford plans to increase its third quarter U.S. production by 10% from a year ago to 740,000 vehicles. (…)

Some auto makers are paying extra rebates to push dealers to increase sales, a practice known as stair-step incentives. For example, Chrysler dealers who met certain month-end sales goals were paid a rebate of $600 a vehicle, while Nissan dealers got up to $500 a vehicle for hitting its targets, according to dealers.

The payments can amount to anywhere from $50,000 for a small dealer to several hundred thousand dollars for larger dealership groups, dealers say. Chrysler and Nissan declined to comment on their programs.


Trend to watch:


Haver Analytics

Sad smile  U.S. Construction Spending Inches Higher


U.S. construction activity remains limited to private housing.




Haver Analytics

Green with envy  Government to Hold Back Growth for Years

Shifting government finances are likely to take an even bigger bite out of growth over the next few years than many now expect, economists at the San Francisco Fed warned Monday.

In a research note, Brian Lucking and Daniel Wilson write fiscal policy headwinds will subtract one percentage point from growth over the next three years beyond the normal fiscal drag that usually comes during times of recovery. If not for the current and likely future stance of fiscal policy, the economy would be growing at a faster rate, which would allow for more robust job growth and, presumably, a more normal stance of monetary policy for the Federal Reserve.

“Federal fiscal policy has been a modest headwind to economic growth so far during the recovery,” the economists wrote. But due to a more rapid than expected contraction in the budget deficits, due largely to rising tax revenue, “federal budget trends will weigh on growth much more severely over the next three years.” (…)

“While our estimates show that fiscal policy has held back the recovery slightly to date, the effect over the next three years looks much bigger,” they wrote. “The excess fiscal drag on the horizon comes almost entirely from rising taxes.”

Fingers crossed  CONSUMER HOPES

American consumers always seem to come to the rescue. Weekly chain store sales jumped 1.9% last week, offering hope for a decent summer for retailers. The 4-week m.a., although still in a downtrend,  is up 2.8%, its best showing since January.





Fingers crossed  Spanish Job Seekers Fall

[image]The number of registered job seekers in Spain fell in May by a record amount and for the second consecutive month, the latest sign that unemployment in the recession-hit economy may be close to peaking.

Spain’s labor ministry said Tuesday the number of people filing for jobless benefits fell 2% to 4.89 million in May from April, the lowest mark since December last year. The number of job seekers fell by 98,265, the largest drop in the month of May ever, the ministry said. The decline was almost double the average fall in May, traditionally a good month for employment because of strong hiring ahead of the summer holiday season.

Still, seasonally-adjusted claims, a gauge of underlying unemployment trends, were practically flat—a fall of just 265 from April—and overall jobless claims still rose 3.8% from May last year.

Spain’s Crisis Fades as Exports Transform Country

Spanish exports climbed to a record 223 billion euros ($291 billion) last year as a drought in orders at home pushed companies to upgrade products and go abroad. (…)

The European Commission forecast in May that exports will grow 4.1 percent this year, almost twice the European Union average rate. Exports of goods and services as a share of GDP, at 32 percent, was the highest last year since at least 2000, Eurostat figures show. Sales are rising at double-digit rates in fast-growing markets in Asia and Africa, according to Trade Ministry data. (…)

In the last two years, the number of companies that export has jumped by more than 10 percent each year, compared with an increase of 1.7 percent in 2010, data from government agency Icex show. (…)

Exports with high-technology content increased by 14 percent in 2011, after a 17 percent surge in 2010, according to the most recent data available, published by the statistics institute. (…)

U.K. Retail Sales Rose in May on Furniture Demand, BRC Says

Sales at stores open at least 12 months, measured by value, increased 1.8 percent from a year earlier, the London-based trade group and KPMG said in an e-mailed report today. Total sales rose 3.4 percent.

Canadians still piling on consumer debt – but at a slower pace

The good news is that – compared with the fourth quarter of last year – consumer debt in the first quarter fell 2 per cent to $26,935, the first quarterly decline since the third quarter of 2011 and the biggest one since TransUnion started tracking the variable in 2004.

Another encouraging sign is that the year-over-year increase of 3.48 per cent is lower than the increases of the previous two quarters: 5.87 per cent in the fourth quarter of 2012 and 4.60 per cent in the third quarter of last year.

Beijing Caps Home Prices to Control Demand (Pointing up This is a long BB article worth reading. Some excerpts:)

The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high, according to developer Sunac China Holdings Ltd. (1918) and realtor Centaline Group. Local officials will need further tightening as they struggle to meet this year’s target of keeping prices unchanged from last year, said Bacic & 5i5j Group, the city’s second-biggest property broker. (…)

New-home prices in Beijing rose by 3.1 percent in April from the previous month, the biggest gain among the nation’s four so-called first-tier cities, and climbed by the most after Guangzhou in May, according to SouFun Holdings Ltd. (SFUN) They rose in each of the first five months of this year. (…)

New-home price gains in April, the biggest since they reversed declines in November, came even after Beijing on April 8 raised the minimum down payment on second-home mortgages to a record 70 percent and banned single-person households from buying more than one residence, a response to former Premier Wen Jiabao’s urge to counter surging values. (…)

Japan Wages Gain in Boost for Abe’s Drive to Reflate Economy

Monthly wages including overtime and bonuses rose 0.3 percent from a year earlier to 273,427 yen ($2,746), the Labor Ministry said today in Tokyo. The index of regular earnings, excluding overtime and bonuses, for full-time employees rose to 100.9 in April, the highest since October 2008, according to today’s report.

Major Japanese companies may boost summer bonuses by 7.4 percent, the most since 1990, according to a survey published last week by Keidanren, the country’s biggest business lobby.

Sick smile  Japan’s Market Skid Has Bulls Reeling

[image]At a hedge-fund conference in Las Vegas last month, Michael Novogratz, a principal at New York’s Fortress Investment Group, called Japan “the most exciting place to invest in the world.”

The bet paid off big, at first: The benchmark Nikkei 225 index soared 83% over the seven months to late May. Foreigners fell in love again with a market they had long ago left for dead.

Then, the rally turned with a vengeance. The Nikkei sank 7.3% on Thursday, May 23. It fell 3.2% the next Monday, 5.2% the following Thursday and then 3.7% on Monday of this week. It has fallen 15% in just eight trading days. Mr. Novogratz didn’t return phone calls seeking to determine what he has done with his investments.

US funds left bruised by heavy bond losses
Sharp rise in global yields takes toll

US funds that invest in higher-rated bonds with average maturities of under 10 years lost an average 1.8 per cent in May, marking their worst performance since the depths of the financial crisis in October 2008, according to Lipper, a research group.

Such a broad decline has been rare for these funds. With more than $900bn in assets, these investment vehicles have attracted the lion’s share of inflows from savers in search of regular income and low risk since the crisis.

Ben Bernanke may have to refresh his notions of wealth effect!


NEW$ & VIEW$ (23 MAY 2013)

Global Market Rout Spreads

A 7.3% plunge in Japan’s stock market spilled into Europe, overshadowing moderately better data on the Continent.

After the tumult in Japan, investors jumped quickly out of riskier assets. Spanish and Italian government bonds weakened, as did more-speculative currencies like the South African rand. Havens such as German government bonds and the Swiss franc gained. Gold also rose.

Pointing up  Before Thursday, the Nikkei had risen 50% in 2013 and 10% in less than two weeks.

Japan: is it rally so bad?

(…) Investors should take note. Share prices, relative to expected earnings, have risen by 50 per cent in the past year for the Nikkei 225 and by a third for the Topix to 20 and 16, just a little below long-run averages. For a promising but as yet unproven recovery in a country hoping to emerge from two decades of decline, that is enough for now. Profit-taking was due, and the chill provided by the idea of a less easy Fed and slowing growth in China was a good spur. After all, if those come to pass, Japan’s prospects will indeed look very different.

The Nikkei: a market abducted by retail

Blame Bernanke, China or the BoJ but this Nikkei rout has apparently been led by the little guys. From the FT:

Over the past few weeks, individual investors’ share of trading had risen steadily, to a record 35 per cent last week. Brokers say their share was almost certainly higher over the past few days, judging by huge volumes in popular stocks such as Fast Retailing, owner of Uniqlo, and Mitsubishi Motors […]

The scale of the fall [says Stefan Worrall, director of equity sales at Credit Suisse in Tokyo], “just shows the extent to which this market has become abducted by retail.”

Fed’s Varied Voices Leave Market Guessing Bernanke said the Fed could start reducing bond buying “in the next few meetings” but warned against premature action, amid conflicting messages that roiled markets.

The Fed could take a first step toward reducing the program at one of its “next few meetings,” Mr. Bernanke said, but he cautioned that he was reluctant to move prematurely or aggressively.

The comments, given at a congressional hearing Wednesday, gave markets a dose of clarity for a few hours, though a subsequent release of minutes from the Fed’s April 30-May 1 Fed policy meeting added to investor anxiety about the Fed’s plans. The minutes disclosed that some officials were prepared to start pulling back the program as early as the Fed’s next meeting in June, though the group as a whole, too, expressed hesitance. (…)

“We are trying to make an assessment of whether or not we have seen real and sustainable progress in the labor-market outlook,” Mr. Bernanke said. (…)

“A premature tightening [would] carry a substantial risk of slowing or ending the economic recovery,” Mr. Bernanke said.

Gavyn Davies
Falling inflation complicates Fed’s QE exit plan

(…) In Mr Dudley’s words, “once you are caught in deflation, it is very hard to get out. Thus, policymakers need to put considerable weight on this risk and conduct monetary policy with sufficient aggressiveness to ensure that they avoid such an outcome”. He also argued that the Fed made a mistake with its earlier “start-stop” approach to QE and “put too much emphasis, too early, on the exit”. The implication is that he does not want to do that again. (…)

After yesterday’s evidence, it is clear that the Fed’s decision on tapering will be “data determined”. But the relevant data include inflation reports as well as employment reports. The Fed is now missing both parts of its twin mandate in the same direction. This will complicate, and perhaps delay, the decision on when to start tapering QE.

Housing Off to Solid Spring

Sales of foreclosed homes fell in April, and the number of properties on the market rose at the start of the spring selling season, suggesting further improvement in the housing market this year.

[image]Existing-home sales inched up 0.6% in April from a month earlier to a seasonally adjusted annual rate of 4.97 million, the National Association of Realtors said Wednesday. The results were the highest since November 2009 and were 9.7% above the same month a year earlier.

The report brought several new signs that the housing market is well on its way to recovery from the housing bust. Homes sold in April were on the market for a median of 46 days, down from 83 a year earlier. The median sale price in April was $192,800, up 11% from a year earlier, the highest since August 2008. Sales of homes under $100,000, including many foreclosures, were down nearly 10% from a year earlier, while sales of properties for more than $750,000 were up by more than 40%.

Pointing up  The overall percentage of sales that were foreclosures and other distressed properties fell to 18%, the lowest level since the Realtors’ group began tracking the issue through surveys of agents in October 2008. (…)

The inventory of previously owned homes listed for sale at the end of April increased 11.9% to 2.16 million homes, but was still down 13.6% from year-ago levels.

From Toll Brothers conf. call:

Mr. Yearley added that Toll raised prices by about $26,000 per home on average during the quarter, noting that “in many markets as prices increase, a sense of urgency takes hold and demand continues to rise.”

That’s a 5% price rise on Toll’s average selling price.

Home Supply Limited by Americans Lacking Equity to Sell

About 22 million Americans may lack enough home equity to move, keeping property listings tight and limiting sales as the housing market recovers, Zillow Inc. said.

Forty-four percent of homeowners with mortgages owed more than their properties are worth or had less than 20 percent equity in the first quarter, the Seattle-based real estate data company said in a report today. Those people probably are locked in to their residences, because listing a house and purchasing a new one generally requires equity of at least 20 percent to meet costs such as a down payment and broker fees, Zillow said.

The people who cannot sell are contributing to a dearth of home inventory on the market, which is restraining deals in the key U.S. spring selling season. There were 2.16 million homes available last month, the fewest for any April since 2001, the National Association of Realtors reported yesterday. While the low supply is helping to fuel price gains and lift home equity, values have to climb further to ease the shortage, Zillow said. (…)

More than 13 million homeowners were underwater in the first quarter, equal to about 25.4 percent of those with a mortgage, down from 13.8 million at the end of 2012, Zillow said. Another 9 million people had less than 20 percent equity. (…)

About 1.4 million homeowners will regain positive equity by the first quarter of 2014, according to a Zillow projection.

Auto  Auto Makers to Skip Summer Closings

U.S. auto makers are accelerating production lines and, in some cases, even canceling the North American industry’s traditional summer factory shutdowns to pump out more vehicles and meet strong demand.

General Motors Co., Ford Motor Co. and Chrysler Group LLC are running their factories at full tilt amid continued sales increases. Annualized U.S. automotive sales reached a 14.9 million vehicle pace in April. Auto executives expect U.S. sales for all of 2013 to reach 15 million vehicles, above last year’s 14.5 million mark.

Detroit brands have made strong market share gains this year. They held 45.9.% of the U.S. market year-to-date through April, exceeding the 44.9% share of Japanese and South Korean auto makers. A year ago, the U.S. was at 44.4% while Asian auto makers had 46.3%.

The chart, courtesy of Haver Analytics, shows the flattening in demand in 2013…

China data add urgency to stimulus calls
Preliminary PMI numbers highlight sluggish economy

(…) Most alarming in the PMI was the fact that declines in the gauges of new orders and employment appeared to be driven by a slump in domestic demand rather than external weakness. (…)

Germany Survey Shows Export Risks Are Companies’ Biggest Concern

Forty-one percent of companies polled by the industry and trade chambers’ DIHK umbrella organization said they worry most about export demand. While 30 percent of the companies expect their sales abroad to grow, 13 percent of respondents expect exports to decline.

Pointing up  Markit’s May PMI for Germany:

May data indicated a stabilisation of German  private sector business activity, with both  manufacturing and services output little-changed
since the previous month. At 49.9, the seasonally  adjusted Markit Flash Germany Composite  Output Index improved from a five-month low of
49.2 in April, but remained weaker than its long-run  average (52.9). The latest index reading for  manufacturing production (50.2) was fractionally  higher than that recorded for services activity  (49.8), which reversed the trend seen in April.

The overall stabilisation in output was partly  achieved through work on outstanding projects, as  total new business volumes decreased for the third  month running. Across the German private sector as  a whole, backlogs of work dropped at the fastest  pace so far in 2013, largely reflecting a marked  decline at service providers. New business
received in the service economy fell at the steepest rate since last September, while manufacturing new  order volumes were broadly unchanged over the  month. Subdued demand from foreign markets
continued nonetheless in the manufacturing sector,  as highlighted by a decrease in new export work for the third successive month.


NEW$ & VIEW$ (14 MAY 2013)

Retail Sales Gain Shows Resilient American Consumer

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

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

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

Markit provides more details:

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


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


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





Small Business Optimism Up in April


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



Economists Cut China Forecasts

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

[image]A survey of 18 economists by The Wall Street Journal late last year showed the median forecast for economic growth in 2013 at 8%, up from the 7.8% rise China’s economy posted last year.

But now the numbers are telling a different story. A new survey of 12 economists this week showed that the median forecast has since fallen to 7.8%.

The chart illustrates what I pointed out yesterday.

Fingers crossed  Industrial production up by 1.0% in euro area

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


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


German Investor Confidence Rose Less Than Forecast in May

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

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


Updated Q1 Earnings Season EPS and Revenue Beat Rates

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

Guidance Spread Negative But Inching Higher

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

And this from ISI: revisions remain negative.


That equities/commodities disconnect

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

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

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

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

In its most recent analysis, which takes a five-year view of the oil market, the IEA said U.S. production is rising much faster than previously forecast as a result of sustained high prices and more-efficient operations.

The latest forecast marks a shift in the IEA’s previous thinking, which saw supply growth split between OPEC and non-OPEC countries in the medium term. The fast U.S. supply growth has diminished U.S. demand for oil from OPEC members like Nigeria, and in the long term, growing U.S. exports of oil and natural gas could further weaken OPEC, says Amy Myers Jaffe, who studies energy and the oil industry at the University of California at Davis but didn’t know the contents of the IEA report. (…)

According to the IEA, average North American production is expected to grow by 3.9 million barrels a day between 2012 and 2018, accounting for more than half of the increase in non-OPEC production for the period.

(…) the IEA expects demand for OPEC oil to fall below 30 million barrels a day—the organization’s self-imposed production ceiling. IEA expects that trend to endure until 2018. (…)

According to the IEA’s projections, average OPEC production capacity will rise by 1.75 million barrels a day between 2012 and 2018 to reach 36.75 million barrels a day by the end of the period. The previous estimate pegged OPEC production capacity between 2011 and 2017 to grow 3.34 million barrels a day to 37.54 million barrels a day in 2017.

These changes coupled with the continuing rise in Asian demand will have a profound impact on the market over the next five years, the IEA said.

“There is hardly any aspect of the global oil supply chain that will not undergo some measure of transformation over the next five years, with significant consequences for the global economy and oil security,” the IEA said.


IPOs Set to Raise Most Cash Since Crisis

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

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


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


NEW$ & VIEW$ (6 MAY 2013)

Smile  Job Gains Calm Slump Worries

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


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

High five  But, as Markit notes:

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

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

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

And this from NBF:

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

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


Storm cloud  Spring Swoon Alive and Well in Manufacturing

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

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

Vehicle sales peaked in November and have fallen in four of the past five months but auto production continued at double-digit year-on-year rates through March, he said. That disconnect could result in longer summer shutdowns or slow down at some factories, robbing manufacturing of one of its growth engines.

If the auto sector is starting to sputter, the defense industry has stalled. Military factory orders plunged 34% in March, the month across-board-government cuts backs known as the sequester began. Defense spending has been volatile in recent months, but is down 25% from a year ago. (…)

Storm cloud  Factory Orders Fell 4% in March

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

(…) Orders for long-lasting items, including cars and machinery, fell 5.8%, slightly worse than last week’s initial estimate.

Demand for civilian aircraft and parts fell 48.3% in March. Orders for metals dropped 3.2% and machinery demand eased 0.8%.

Meanwhile, March orders for nondurable products, reported for the first time Friday, fell 2.4%. (…) Petroleum refining fell 7.3% in March, partially reflecting lower prices. Food processing, clothing and chemical production also declined during the month. (…)

Defense capital goods orders fell 34.4% in March, the first month of the so-called sequester.

Outside of defense, factory orders fell 3.5%

Total factory shipments, including durable and nondurable goods, decreased 1% during March, compared with small gains the prior two months, the Commerce Department said. (…)

ISM Services Weaker Than Expected

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


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



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


Spanish Jobless Claims Dwindle

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

Portugal Unveils Budget Cuts

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

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

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

Party smile  France Says Austerity Over on Germany Flexibility


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

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3 percent of GDP this year. The shortfall will amount to 3.9 percent of GDP this year and 4.2 percent next year with no policy change, the commission said.

There is a “certain flexibility” in allowing France, as well as Spain, to meet its deficit targets, Schaeuble told the Bild am Sonntag newspaper in an interview published yesterday. “This comes with clear conditions for the necessary reforms. The commission will make concrete proposals by the end of May which then will be discussed and decided upon among the euro area finance ministers.” (…)

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

(…) Gross domestic product grew 6 per cent in the first quarter compared with a year earlier, according to government data released on Monday, lower than the 6.1 per cent delivered in the last quarter of 2012.

(…) the breakdown of the GDP data shows that the pace of growth in investment across the economy is starting to slow because of the knock-on effects of lower export commodity prices.

Australia Retail Sales Fall

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

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


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

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

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

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

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

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

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

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


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

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

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


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

Fingers crossedSyria Strikes Raise Alarm

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


NEW$ & VIEW$ (2 MAY 2013)

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

Sad smile  U.S. Vehicle Sales Move Lower

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

Sad smile  U.S. Construction Spending Reverses Earlier Rebound

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

Fed Steps on Gas as Inflation Slows

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

(…) the Fed, in a statement released after Wednesday’s meeting, evinced no sign it is leaning toward pulling back. Instead, it struck a more neutral tone and emphasized it could “increase or reduce” the size of its monthly bond purchases, depending on inflation and job growth in the months ahead. (…)

“Fiscal policy is restraining economic growth,” the Fed said bluntly about U.S. tax and spending policies aimed at short-term budget-deficit reduction. Fed Chairman Ben Bernanke has called on the Obama administration and Congress to agree to a budget plan that reduces deficits in the long run without cutting much right away while the economy is weak.

The global inflation slowdown is one of the more surprising developments confronting the Fed and other central banks, and has become more apparent in recent few weeks. (…)

The U.S. Commerce Department reported Monday that consumer prices rose just 1% in the 12 months ending in March, well below the Fed’s 2% target. In the 17-member euro zone, inflation hit 1.2% in April, the lowest rate in more than three years and also well below the ECB’s target of just under 2%. (…)

Several indicators suggest inflation pressures have receded in recent weeks. Futures prices for commodities, including oil, cotton, sugar and gold, are all down from a year earlier.

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

The April composite index of manufacturing activity from the Institute for Supply Management slipped to 50.7 from an unrevised 51.3 in March. During the last ten years, there has been a 69% correlation between the ISM index and the q/q change in real GDP.

Leading the overall index down was a lower employment reading. The sharp decline to 50.2 brought it to nearly the lowest level of the economic expansion. During the last ten years there has been an 88% correlation between the employment index and the m/m change in factory payrolls. 

Also down sharply last month was the inventories series (46.5). Offsetting these declines were gains in supplier deliveries (50.9), a rise which indicated slower delivery speeds, production (53.5) and new orders (52.3). The new export orders index (54.0) also fell m/m but remained much higher than the November low of 47.0. 



Lightning  Alcoa Battling Aluminum Surplus

Alcoa Inc. said it will consider cutting up to 11% of its current smelting capacity as the U.S. aluminum giant tries to weather low prices for the industrial metal.

Aluminum prices have fallen by more than one third since 2011 due to a prolonged slump in the raw-aluminum market.

Russia’s United Co. Rusal PLC, the world’s largest producer of aluminum by volume, has already announced plans to reduce output by 300,000 tons, or 7% of production, in 2013, and permanently close 275,000 tons of capacity by the end of 2015.

(…) it is up to big aluminum makers outside China to cut production and aim for a total reduction of 1.5 million tons over the next three years, he said. “Industrywide, it should be a common agenda,” he said. Global production of raw aluminum reached 45.2 million tons in 2012, up 33% from 33.9 million tons in 2006.

Those cuts would be in addition to 568,000 metric tons, or 13%, of smelting capacity that the company currently has idle.

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

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

Six Months After Sandy, Small Firms Struggle

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


Russell 2000 Back Below 50-DMA

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

Is it time to sell in May and go away?

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

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

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

Doug Short remains objective:

Market lore is full of monthly associations: The January Effect, Sell in May and Go Away, Summer Rallies, the September Slump, Manic-Depressive October, December Rallies, etc.

The first chart shows the average monthly gains/losses, excluding dividends, since 1928 for all twelve months. May is one of the three months with a negative average. Incidentally, the monthly average of all months lumped together is 0.59%. So May has underperformed the mean by 0.73%.

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

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

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

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

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


NEW$ & VIEW$ (1 MAY 2013)

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


Housing Market Heating Up

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

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

In some of the hardest-hit markets, the gains have been particularly heady. Home prices rose 23% from one year ago in Phoenix and 18.9% in San Francisco. Nationally, the median home price in March stood at $184,300, well below the peak of $230,400 in 2006 but up from $154,600 in January 2012. (…)

For now, recent data suggest home-price gains are likely to continue. Sales of previously owned homes rose by 10.3% from one year ago in March, even as supplies of homes for sale fell by 16.8%. The Wall Street Journal’s quarterly survey of market conditions in 28 metropolitan areas showed very low supplies of homes available in a rising number of markets, including a less-than-three-month supply in a dozen markets, including the two hottest—Phoenix and San Francisco. (…)

At current mortgage rates near 3.5%, home values would need to rise by 32% nationally—and by as much as 48% in markets across the Midwest and north Florida—for affordability to return to its long-run average, according to an analysis by John Burns Real Estate Consulting in Irvine, Calif.




Confused smile  Krueger: Sequester Hits Harder, Earlier Than Expected

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

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

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

Storm cloud  China Manufacturing Weakens

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

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

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

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

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

Lightning  Eurozone retail sales continue to fall sharply in April

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

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

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

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


Denmark Exhausts Stimulus Avenues as Housing Losses Persist

Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started.

“We’ve used whatever leeway there is,” Economy Minister Margrethe Vestager said in a telephone interview from Copenhagen late yesterday. “There’s no more space to stimulate the Danish economy.”

Seoul offers exporters $10bn of help
Companies dealing with sluggish global demand and weaker yen

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

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

However, he cautioned that Seoul would closely monitor the weakening Japanese yen, a source of growing concern for South Korean policy makers. This follows a warning last month from finance minister Hyun Oh-seok that the yen’s slide was already having an impact on the South Korean economy.

Despite a recent fall in the US dollar value of the South Korean won, it has strengthened by 21 per cent against the yen over the past seven months, as markets anticipate expansionary fiscal and monetary policy under Japan’s new government. (…)

On Monday, data showed that South Korea’s industrial production suffered a month-on-month fall of 2.6 per cent in March: the third successive decline.

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

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

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

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


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


Lightning  Slovenia Junks Its Bond Sale After Downgrade

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

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

Moody’s said it was concerned about Slovenia’s undercapitalized banking sector and deteriorating government balance sheet.

Rift Emerges Over Saudi Oil Policy

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

The Middle Eastern kingdom, which produces around 10% of the world’s oil, needs to increase its crude production capacity by a fifth to 15 million barrels a day by 2020 in order to meet rising domestic consumption and maintain its current export capacity, said Prince Turki al-Faisal, a former intelligence chief and ambassador for the kingdom. (…)

The comments from the prince, who has no formal government position, but is a prominent member of the kingdom’s royal family, were contradicted by Saudi Oil Minister, Ali al-Naimi. There is currently no need to increase crude production capacity beyond 12.5 million barrels a day, Mr. Naimi said.

Saudi Arabia currently produces around 9 million barrels a day of oil, leaving 3.5 million barrels a day as spare capacity. (…)

Prince Faisal’s comments also run counter to the official position of the state-controlled Saudi Arabian Oil Co., also known as Aramco. Aramco declined to comment Tuesday, but its top executive has previously ruled out increasing capacity to 15 million barrels a day despite acknowledging that domestic use of crude would rise and thus limit exports.

Aramco’s Chief Executive Khalid al-Falih ruled out increasing Saudi production capacity to 15 million barrels a day in 2011, despite acknowledging that domestic use of crude would rise and thus limit exports, because he said expansion plans in other producing countries such as Iraq and Brazil should be enough to satisfy world markets. (…)

Saudi Arabia last year consumed around 3 million barrels per day of oil, according to the U.S. Energy Information Administration, almost double its 2000 level and putting it on track to use more than 5 million barrels a day if a 7% annual growth rate were to continue.

Aramco’s Mr. al-Falih acknowledged in 2011 that, if left unchecked, domestic energy consumption would rise to 8.2 million barrels of oil a day by 2030. (…)

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