NEW$ & VIEW$ (3 FEBRUARY 2014)

Slow Income Growth Lurks as Threat to Consumer Spending A slowdown in U.S. income growth could short-circuit the surge in consumer spending that propelled the economic recovery in recent months.

As the holiday shopping season wrapped up, personal consumption rose a seasonally adjusted 0.4% in December from a month earlier, the Commerce Department said Friday. With a 0.6% increase in November, the final two months of 2013 marked the strongest consecutive gains since early 2012.

The upturn came while incomes were flat during the month. Real disposable income, which accounts for taxes and inflation, advanced just 0.7% during 2013. That was the weakest growth since the recession ended in 2009. (…)

Across 2013, the Commerce Department’s broad measure of spending on everything from haircuts to refrigerators was up 3.1% from the prior year. That was the weakest annual increase since 2009 and below the 4.1% growth seen in 2012.

But the pace of spending was substantially stronger in the final six months of last year. Economic growth in the second half of 2013 represented the best finish to a year in a decade. Consumer spending, which makes up more than two-thirds of the nation’s gross domestic product, was the primary driver. (…)

The personal saving rate fell to 3.9% in December from 4.3% in November. (…)

Friday’s report showed subdued inflation across the economy. The price index for personal consumption expenditures—the Fed’s preferred inflation gauge—rose 1.1% in December from a year earlier. While the strongest since August, the figure remains well below the central bank’s 2% inflation target. (…)

A separate Labor Department report Friday said employment costs in the last three months of 2013 were 2% higher than a year ago. Annual cost increases typically exceeded 3% before the 2007-09 downturn wiped out millions of jobs. (…) (Chart and table from Haver Analytics)

Try to see anything positive from the table. I suspect that spending data for the last few months of 2013 will be revised lower in coming months. In any event, the income side is desperately weak.imageLast 3 months of 2013:

  • Personal Income: +0.1%
  • Disposable Income: –0.2%
  • Real Disposable Income: –0.3%
  • Consumption Expenditures: +1.1%
  • Real Expenditures: +0.9%

Bloomberg Orange Book comments from retailers about January performances were mostly negative and suggest future weakness. Wal-Mart pared its sales forecast based on curtailment of the food stamp benefit program and other specialty apparel retailers issued statements of concern. (BloombergBriefs)

Makes you wonder about this Bloomberg article: Global Earnings Are Poised to Accelerate in 2014 as U.S. Consumers Spend More

Meanwhile:

China’s Manufacturing Activity Slows

The official manufacturing PMI fell to 50.5 in January, from 51.0 in December, the federation said. The January PMI was in line with the median forecast by economists in a Wall Street Journal poll. (…)

The new orders subindex dropped to 50.9 in January from 52.0 in December, and the subindex measuring new export orders declined to 49.3 from 49.8, the statement said.

The employment subindex dropped to 48.2 from 48.7, while the output subindex fell to 53.0 from 53.9. Mr. Zhang said the fall in the new orders subindex shows weakness in domestic demand.

The subindex measuring the operation of large firms of the official PMI, heavily weighted towards larger state-owned enterprises, dropped to 51.4 from 52.0, while the one measuring smaller firms fell to 47.1 from 47.7. (…)

The HSBC China Manufacturing PMI, which is tilted toward smaller companies, fell to a final reading of 49.5 in January from 50.5 in December, HSBC said Thursday.

In another sign of slower momentum among factory owners, profit at major Chinese industrial enterprises grew at a slower pace, expanding by 6% in December from the same month a year earlier to 942.53 billion yuan ($155.6 billion), a reduction from November’s 9.7% increase, official data released earlier in the week showed

Moscow casts doubt over Russian growth
GDP rose 1.3% in 2013 just missing government forecasts

Gross domestic product increased by 1.3 per cent in 2013, narrowly missing the government’s most recent forecast of 1.4 per cent, the Federal Statistics Service in its preliminary GDP estimate said on Friday. (…)

The economy ministry said while the economy was past its lowest point, it was unclear whether it could grow by 2.5 per cent this year as forecast earlier. Most banks and independent economists are more pessimistic than the government and estimate growth this year to stay well below 2 per cent. (…)

“In the first quarter, we expect growth on a level around 1 per cent. In the second quarter, growth will be higher, probably somewhere around 2 per cent or 1.5 per cent,” Andrei Klepach, Mr Ulyukayev’s deputy, said in remarks carried by Russian news agencies. “We can stick to our forecast of 2.5 per cent, although it is possible, if you take the current trends, that growth might be lower.”

However, the decline of the rouble, which has fallen to its lowest against the dollar in five years amid the recent emerging markets currency jitters, could alter that calculation, as a weaker currency makes its exports more competitive.

“In our view, a lower rouble rate is better for economic growth,” said Mr Klepach. “But it would be worse for both growth and inflation if there were bigger volatility.”

In a survey published last week, MNI, an affiliate of Deutsche, said the weakening rouble was helping Russian businesses and respondents were the most positive on exchange rate conditions in January since the survey began last March.

Materially Slower Spending Growth by Emerging Market Countries Will Be Felt

Emerging market economies are of increasing importance to mature economies, such as the US. For example, the share of US merchandise exports shipped to emerging markets has risen from 2003’s 44% to 2013’s prospective 55% of US merchandise exports. During the first 11 months of 2013, US exports to emerging markets grew by 4.6% annually, which compared most favorably to the -0.5% dip by exports to advanced economies.

image

The faster growth of US exports to emerging markets is consistent with 2013’s much faster 4.7% growth of the emerging market economies compared to the accompanying 1.3% growth of advanced economies. Moreover, this phenomenon is hardly new according to how the emerging markets outran mature economies for a 14th straight year in 2013. Since year-end 1999, the average annualized rates of real economic growth were 6.1% for the emerging markets and a sluggish 1.8% for the advanced economies. By contrast, during the 14-years-ended 1999, the 3.7% average annual growth rate of the emerging markets was much closer to the comparably measured 3.1% growth of the advanced economies. (Figure 1.)

imageEmerging markets are acutely sensitive to industrial commodity prices
Emerging market economies can suffer to the degree major central banks succeed at curbing product price inflation. Though it’s difficult to separate the chain of causation, the 0.74 correlation between the growth of Moody’s industrial metals price index and emerging market country economic growth is much stronger than the price index’s 0.28 correlation with the growth of advanced economies. In fact, the 0.74 correlation of emerging market country growth and the base metals price index is far stronger than the 0.19 correlation between the growth rates of emerging market and advanced economies.
According to the above approach, the percent change of Moody’s industrial metals price index is relative to the price index’s average of the previous three years. The recent industrial metals price index trailed its average of the previous three years by -8%. (Figure 2.)

The latest decline by industrial metals prices suggests that the emerging market economies will grow by less than the 5.1%, which the IMF recently projected for 2014. When the aforementioned version of the percent change for the industrial metals price index is above its 8.3% median of the last 34 years, the median yearly increase by emerging market economic growth is 5.9%. By contrast, when the base metals price index grows by less than 8.3% annually, the median annual increase for emerging market growth drops to 3.7%. (Moody’s)

As U.S. debates oil exports, long-term prices slump below $80 Long-term U.S. oil prices have slumped to record discounts versus Europe’s benchmark Brent, with some contracts dropping below $80 in a dramatic downturn that may intensify producers’ calls to ease a crude export ban.

imageOil for delivery in December 2016 has tumbled $3.50 a barrel in the first two weeks of the year, trading at just $79.45 on Friday afternoon, its lowest price since 2009. That is an unusually abrupt move for longer-dated contracts that are typically much less volatile than prompt crude. For most of last year, the contract traded in a narrow range on either side of $84 a barrel.

The shift in prices on either side of the Atlantic is even more dramatic further down the curve, with December 2019 U.S. crude now trading at a record discount versus the equivalent European Brent contract. The spread has doubled this month to nearly $15 a barrel, data show.

The drop in so-called “long-dated” U.S. oil futures extends a broad decline that has pushed prices as much as $15 lower in two years. It also coincided with an abrupt drop in near-term futures, which fell by nearly $9 a barrel in the opening weeks of 2014 amid signs of improving supply from Libya.

But while immediate prices have rebounded swiftly thanks to strong demand amid frigid winter weather and new pipelines that may drain Midwest stockpiles, longer-term contracts have not.

The unusual speed, severity and persistence of the decline has mystified many in the oil industry. Brokers, analysts and bankers have offered a range of possible explanations: a big one-off options trade in the Brent market; new-year hedging by U.S. oil producers; liquidation by bespoke fund investors; or even long-term speculation on a deepening domestic glut.

Regardless of the trigger, however, it may be cause for growing alarm for crude oil producers, who are increasingly concerned that falling prices will crimp profit margins if U.S. export constraints are not eased. Producers say this would hand over some of their rightful profits to refiners who can freely export gasoline and diesel at world prices. (…)

EARNINGS WATCH

Amid all the EM turmoil and the barometers of all kinds, let’s pause for a moment to take a look at the main ingredient, half way into the earnings season.

  • Factset provides its usual good rundown:

With 50% of the companies in the S&P 500 reporting actual results, the percentages of companies reporting earnings and sales above estimates are above the four-year averages.

imageOverall, 251 companies have reported earnings to date for the fourth quarter. Of these 251 companies, 74% have reported actual EPS above the mean EPS estimate and 26% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is
above the 1-year (71%) average and the 4-year (73%) average.

In aggregate, companies are reporting earnings that are 3.6% above expectations. This surprise percentage is above the 1-year (3.3%) average but below the 4-year (5.8%) average.

The blended earnings growth rate for the fourth quarter is 7.9% this week, above last week’s blended earnings growth rate of 6.3%. Upside earnings surprises reported by companies in multiple sectors were responsible for the increase in the overall earnings growth rate this week. Eight of the ten sectors recorded an increase in earnings growth rates during the week, led by the Materials sector.

The Financials sector has the highest earnings growth rate (23.7%) of all ten sectors. It is also the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 4.9%.

In terms of revenues, 67% of companies have reported actual sales above estimated sales and 33% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the average percentage recorded over the last four quarters (54%) and above the average percentage recorded over the previous four years (59%).

In aggregate, companies are reporting sales that are 0.1% below expectations. This percentage is below the 1-year (0.4%) average and below the 4-year (0.6%) average.

The blended revenue growth rate for Q4 2013 is 0.8%, above the growth rate of 0.3% at the end of the quarter (December 31). Eight of the ten sectors are reporting revenue growth for the quarter, led by the Health Care and Information Technology sectors. The Financials sector is reporting the lowest revenue growth for the quarter.

At this point in time, 54 companies in the index have issued EPS guidance for the first quarter. Of these 54 companies, 44 have issued negative EPS guidance and 10 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 81% (44 out of 54). This percentage is above the 5-year average of 64%, but slightly below the percentage at this same point in time for Q4 2013 (84%).

image

For Q1 2014, analysts are expecting earnings growth of 2.2%. However, earnings growth is projected to improve in each subsequent quarter for the remainder of the year. For Q2 2014, Q3 2014, and Q4 2014, analysts are predicting earnings growth rates of 8.5%, 12.4%, and 11.9%. For all of 2014, the projected earnings growth rate is 9.6%.

Note that the 2.2% growth rate expected for Q1’14 is down from 4.3% on Dec. 31. The 9.6% growth rate for all of 2014 is down from 10.6% on Dec. 31.

Pointing up Data can vary depending on which aggregator one uses. Factset’s reports are the most complete but the official data still come from S&P.

  • Half way into the season, S&P’s tally shows a 69% beat rate and a 20% miss rate.

Importantly, Q4’13 estimates rose from $28.77 On Jan. 23 to $29.23 on Jan. 30. S&P also detailed the impact of two large pension adjustments at AT&T and Verizon: their gains added $0.94 to the Q4’13 operating EPS while they cost the Index $1.26 in Q4’12. Taking these out, just for growth calculation, Q4’14 EPS would be up 16% YoY if the remaining 250 companies meet estimates, up from +12.2% in Q3 and +3.7% in Q2. The economic acceleration is thus translating into faster profit growth and still rising margins.

We should keep in mind, however, that easy comparisons account for a big part of the strong earnings growth. Comparisons are particularly easy for three companies – Bank of America, Verizon, and Travelers. Exclude these three companies and total earnings growth for the S&P 500 companies that have reported drops to +6% from +12.0%.

Nonetheless, Zack acknowledges that if remaining companies meet estimates

Total earnings in Q4 would be up +9.6% on +0.7% higher revenues and 79 basis points higher margins. This is a much better earnings growth picture at this stage of the reporting cycle than we have seen in recent quarters. In fact, +9.6% growth is the highest quarterly earnings growth rate of 2013.

Zacks provides another useful peek at earnings trends with actual dollar earnings instead of per share earnings.

image

Trailing 12m EPS are now seen reaching $108.28 after Q4’13 (+5.9% QoQ) and $110.64 after Q1’14, assuming Q1 estimates of $28.13 (+9.2%) are met. They have been shaved 0.6% in the last week.

  • The Rule of 20 P/E barometer, a far more useful barometer than the January barometer, has retreated back into the “lower risk” area at 18.2x, down from 19.7x in December 2013. This is the third time in this bull market that the Rule of 20 P/E (actual P/E on trailing EPS + inflation) has refused to cross the “20 fair value” line after a rising run, a rare phenomenon that last occurred in the early 1960s. image

In all the media frenzy about the recent equity markets setbacks, the U.S. earnings trend should take center stage. Rising earnings remain the main fuel for bull markets, over and above QEs of all kinds. Notice the sharp uptrend yellow line in the chart above. This line plots where the fair value of the S&P 500 Index based on the Rule of 20. In effect, it is derived from multiplying trailing 12m EPS by (20 minus inflation) or 18.3 at present using core CPI. It is the difference between the yellow line and the actual S&P 500 Index (blue line) that is measured by the thick black line (actual P/E + inflation).

Deep undervaluation is reached when the thick black line, the Rule of 20 barometer, is below 17.5 (historical lows around 15). Extrapolating 3 months down with trailing EPS at $110.64, the Rule of 20 P/E would be 17.8x if the Index remains at 1782 and inflation is stable at 1.7%. This would dictate a fair value of 2025 on the Index, +13.6% from current levels. On the other side, a decline in the Rule of 20 P/E to the 15-16x range would take the Index down 11-17% to 1470-1580. Taking the mid-point downside risk of 14%, the upside/downside is nearly identical, not a compelling risk/reward ratio to increase equity exposure just yet.

The S&P 500 Index is now sitting on its 100 day m.a.. It has held there four times since June 2013. The 200 day m.a. is at 1705 and is still rising. At 1700, the Rule of 20 P/E would be 17.1x. At that point, upside to fair value would be 19% and downside to the 15.5x level would be 10%. Unless the economic picture, or inflation, change markedly between now and the end of April, I consider the 200 day m.a. to be the worst case scenario in the market turmoil.

Eurozone Bank Earnings Weigh On Stocks

Banks saw the heaviest losses, with poorly-received updates from Lloyds Banking Group andJulius Baer dragging on the sector.

Data showing a faster-than-expected expansion in euro-zone manufacturing in January did little to lighten the mood, as investors focused on the latest disappointments in a downbeat earnings season.

SENTIMENT WATCH

Not since the early summer of that year has the S&P 500 experienced a standard correction of at least 10 per cent. This type of pullback, like a gardener pruning roses in late winter in order to encourage healthy growth in the spring, is what many professional investors would like to see this year.Red rose (…)

Surprised smile Alhambra Investment Partners this week said not only has margin debt hit a record, there has been a massive rise in overall leverage. (…) The firm estimates that total margin debt usage last year jumped by an almost incomprehensible $123bn, while cash balances declined by $19bn. “This $142bn leveraged bet on stocks surpasses any 12-month period in history.” (…)

A torrent of margin calls and larger ETF outflows can easily feed on itself and may well prompt a far stronger corrective slide in stocks than investors expect. Wilted rose

 Ghost Trader’s Almanac –  every down January on the S&P 500 since 1938, without exception, has preceded a new or extended bear market, a 10% correction, or a flat year.

  • Fingers crossed Most Expect Stock Turmoil to Pass A spate of bumpy, uncertain trading has knocked the Dow Jones Industrial Average down 5.3% from its Dec. 31 record. It is threatening to hang around for a while, many money managers say. The big question is how much worse it could get. The widespread belief is, not much.

    Get used to it.

    A spate of bumpy, uncertain trading has knocked the Dow Jones Industrial Average down 5.3% from its Dec. 31 record. It is threatening to hang around for a while, many money managers say. The big question is how much worse it could get.

There is just about everything in this last WSJ piece…and just about nothing with any substance.

ANOTHER BAROMETER…

If you are of the statistical type, you should buy the Stock Trader’s Almanac and drown yourself in numbers and, often, stupidity. Here’s the Decennial Cycle from Lance Roberts, to help you keep the faith ;

There is another piece of historical statistical data that supports the idea of a market “melt up” before the next big correction in 2016 which is the decennial cycle. 

The decennial cycle, or decennial pattern as it is sometimes referred to, is an important one. It takes into account the stock market performance in years ending in 1,2,3 etc. In other words, since we just finished up 2013 that was the third year of this decade. This is shown in the table below.

decennial-cycle-011414

This year, 2014, represents the fourth year of the current decade and has a decent track record. The markets have been positive 12 out of 18 times in the 4th year of the decade with an average return for the Dow Jones Industrial Average since 1835 of 5.08%. Therefore, there is a 66% probability that the end will end positively; however, that does not exclude the possibility of a sharp dip somewhere along the way.

Open-mouthed smile However, looking ahead to 2015 is where things get interesting.  The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying ahead of 2015.  As shown in the chart above, there is a very high probability (83%) that the 5th year of the decade will be positive with an average historical return of 21.47%. 

The return of the positive years is also quite amazing with 10 out of the 15 positive 5th years (66%) rising 20% or more.  However, 2015 will also likely mark the peak of the cyclical bull market as economic tailwinds fade and the reality of an excessively stretched valuation and price metrics become a major issue.

As you will notice, returns in the 6th and 7th years (2016-17) become substantially worse with a potential of negative return years rising.  The chart below shows the win/loss ratio of each year of the decennial cycle.

Decennial-cycle-011414-2

AND MORE ON THE JANUARY BAROMETER

OK, this will be the end of it. Promise. But I thought it was relevant and, I must admit, a little interesting. Cyniconomics introduces the “JAJO EFFECT”:

Our argument begins with four observations (we’ll get to theories in a moment):

  1. Market sentiment often changes during the earnings reporting season – in which most of the action occurs in the first month of the quarter – and these sentiment shifts tend to persist.
  2. Individual investors tend to pay extra attention to their positions early in a quarter, reacting to the past quarter’s results and then looking ahead to the next performance period.
  3. Professional money managers often refine their strategies prior to client reviews or board meetings, which typically occur after results for the prior quarter become available.
  4. Investors (individuals and professionals) are even more likely to rethink strategy in January, partly because it marks a new annual reporting period but also because it tends to be a time for planning and reflection. (How are you doing on those resolutions, by the way?)

These observations are admittedly vague, but we suspect they’re relevant to stock performance. They suggest that the first month of a quarter may set the market’s tone in subsequent months. In the context of today’s markets, they tie into a few questions you may be asking about early 2014 volatility:  Is January’s market drop merely noise on the way to another string of all-time highs, or is there more to it than that? For instance, doesn’t it seem a little ominous that we stumbled out of the gates this year despite sentiment being rampantly bullish? Does this tell us to be cautious going forward?

If you happen to read the Stock Trader’s Almanac, you’ll connect our questions to the “January barometer” (…). The Almanac’s founder, Yale Hirsch, coined the term in 1972 when he presented research showing that January’s return is a decent predictor of full-year returns. He concluded: “As January goes, so goes the year.”

We’ll take a closer look at the January barometer below, while testing two variations drawn from the observations above.

“Downsizing” the January barometer

First, we doubt that any carryover of January’s performance is likely to persist for an entire calendar year. Based on the idea that quarterly reporting cycles may have something to do with these types of anomalies, it doesn’t seem right to think that January’s events should still be relevant near the year’s end.  The first month of a quarter may offer clues about the next quarter or two, but probably not three or four quarters later after investors have shifted focus to subsequent corporate earnings and investment performance reports.

In fact, even without quarterly reporting cycles, you may still question why January would continue to be a “barometer” by the third or fourth quarter.  You may expect to find lower correlations of January returns with the year’s second half than with the first half, and this is exactly what we see:

jajo effect 1

Note that the 33% correlation for the “downsized” January barometer is very high for these types of relationships. It’s comfortably significant based on traditional tests (the F-stat is 8.2).  By comparison, the correlation of January’s return with the 11 months from February to December is still high at 28% but less significant (the F-stat falls to 5.1).

Here’s a scatter plot and trendline for the year-by-year results:

jajo effect 2

The chart shows that 54% of the years with negative January returns included negative returns from February to June (13 of 24), while only 9% of the years with positive January returns were followed by negative February to June returns (8 of 60). In other words, the probability of a down market between February and June was six times higher after a down market in January.

Do years or quarters hold the key to the calendar?

Second, we considered whether April, July and October also qualify as barometers, based on our speculation that the January barometer is partly explained by quarterly phenomena.

In particular, we calculated correlations with subsequent returns for all 12 months to see if the beginning-of-quarter months stand out:

jajo effect 3

Needless to say, the correlations fit the hypothesis, with the four highest belonging to January, April, July and October. The odds of this happening in a purely random market are nearly 500 to 1. Call it the “JAJO effect.”

(…) If stocks don’t recover strongly by month’s end – say, back to the S&P 500′s 2013 close of 1848.36 – the odds favor continued weakness. As January goes, so goes the first half of the year.

 M&A — Best Start to Year Since 2011

Companies and funds inked $228.2 billion worth of acquisitions this month, the highest volume of activity since 2011, according to Thomson Reuters. (…)

Deal making volume is up 85% from January 2013 when all three indexes wrapped up January with gains between 4% and 6%. Yet all that could change quickly, and a big start to the year doesn’t necessarily translate into a big year for M&A.

By mid-February 2013, it looked like M&A was back in a big way — $40 billion worth of deals were announced on one day that month. Despite a 30% plus pop in stock indexes in 2013, M&A activity ended the year far below the pre-crisis peak years.

Still a big difference so far in 2014 is that overall deal making has been wide and deep — crossing industries and regions. Many of the big deals have been corporations buying up other corporations, and the stock market has mostly applauded buyers for making deals. (…)

The winning banks so far? Morgan Stanley takes the top spot for announced global M&A. Credit Suisse is right behind Morgan Stanley. The bank served as an adviser to Lenovo on both of its $2 billion plus bids for U.S. companies in the past two weeks – Motorola Mobility and IBM‘s low-end server business.  Behind them: Goldman Sachs, Bank of America, Deutsche Bank and then Citi. J.P. Morgan, typically a powerhouse deal maker, is in the 10th spot.

 

NEW$ & VIEW$ (31 JANUARY 2014)

U.S. Banks Loosen Loan Standards Big banks are beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing that could underpin a brightening economic outlook.

(…) In both the U.S. and Europe, new reports released Thursday show banks are slowly starting to increase their appetite for risk. The U.S. Office of the Comptroller of the Currency said banks relaxed the criteria for businesses and consumers to obtain credit during the 18 months leading up to June 30, 2013, while the European Central Bank said fewer banks in the euro zone were reporting tightened lending standards to nonfinancial businesses in the fourth quarter of 2013.

(…)  The comptroller’s report said it would still classify most banks’ standards as “good or satisfactory” but did strike a cautionary tone. (…)

An upturn in bank lending, if taken too far, could also lead to inflation. The Fed has flooded banks with trillions of dollars in cash in its efforts to boost the economy. In theory, the printing of that money would cause consumer price inflation to take off, but it hasn’t, largely because banks haven’t aggressively lent out the money. (…)

John G. Stumpf, CEO of Wells Fargo & Co., said on a Jan. 14 conference call with analysts that he is “hearing more, when I talk with customers, about their interest in building something, adding something, investing in something.”

Kelly King, chief executive of BB&T Corp., told analysts two days later, “we really believe that we are at a pivotal point in the economy…admittedly that’s substantially intuitive.” (…)

The comptroller’s survey found more banks loosening standards than tightening. The regulator said that in the 18 months leading up to June 30, 2013, its examiners saw more banks offering more attractive loans.

The trend extended to credit-card, auto and large corporate loans but not to residential mortgages and home-equity loans. (…)

The OCC’s findings are consistent with more recent surveys: The Fed’s October survey of senior U.S. loan officers found a growing number loosening standards for commercial and industrial loans, often by narrowing the spread between the interest rate on the loan and the cost of funds to the bank.

The ECB’s quarterly survey, which covered 133 banks, showed that the net percentage of euro-zone banks reporting higher lending standards to nonfinancial businesses was 2% in the fourth quarter, compared with 5% in the third quarter. (…)

 

U.S. Starts to Hit Growth Stride

A potent mix of rising exports, consumer spending and business investment helped the U.S. economy end the year on solid footing.

Gross domestic product, the broadest measure of goods and services churned out by the economy, grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter, the Commerce Department said. That was less than the third quarter’s 4.1% pace, but overall the final six months of the year delivered the strongest second half since 2003, when the economy was thriving.

Growth Story

A big driver of growth in the fourth quarter was a rise in consumer spending, which grew 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity.

The spike in Q4 consumer spending is very surprising, and suspicious. Let’s se how it gets revised.

Consider these nest 2 items:

(…) For the 14-week period ending Jan. 31, Wal-Mart expects both Wal-Mart U.S. and Sam’s Club same-store sales, without fuel, to be slightly negative, compared with prior guidance. It previously estimated Wal-Mart U.S. guidance for same-store sales to be relatively flat, and Sam’s expected same-store sales to be between flat and 2%.

A number of U.S. retail and restaurant companies have lamented poor winter weather and aggressive discounts, resulting in fewer store visits and lower sales. Many of those companies either lowered their full-year expectations or offered preliminary fourth-quarter targets that missed Wall Street’s expectations.

Wal-Mart warned the sales impact from the reduction in the U.S. government Supplemental Nutrition Assistance Program benefits that went into effect Nov. 1 was greater than expected. The retailer also said that eight named winter storms resulted in store closures that hurt traffic throughout the quarter.

Wal-Mart Stores Inc. warned that it expects fourth-quarter earnings to meet or fall below the low end of its prior forecast, citing government cuts to assistance programs and the harsh winter weather.

Amazon earned $239 million, or 51 cents a share, on sales that were up 20% at $25.59 billion. The 51 cents a share were far below Street consensus of 74 cents, and the $239 million profit on $25 billion in sales illustrates just how thin the company’s margins are.

A year ago, Amazon earned $97 million, or 21 cents a share, on sales of $21.29 billion.

The company also forecast first-quarter sales of $18.2-$19.9 billion; Street consensus was for $19.67 billion. In other words, most of that projection is below Street consensus.

It projected its net in a range of an operating loss of $200 million to an operating profit of $200 million.

Surprised smile AMZN earned $239M in 2013 and projects 2014 between –$200M and +$200M. You can drive a truck in that range. But how about the revenue range for Q1’14:

Net sales grew 20 percent to $25.6 billion in the fourth quarter, versus expectations for just above $26 billion and slowing from the 24 percent of the previous three months.

North American net sales in particular grew 26 percent to $15.3 billion, from 30 percent or more in the past two quarters.

Amazon also forecast revenue growth of between 13 and 24 per cent in the next quarter, compared to the first quarter 2013.

Notwithstanding what that means for AMZN investors, one must be concerned for what that means for U.S. consumer spending. Brick-and-mortar store sales have been pretty weak in Q4 and many thought that online sales would save the day for the economy. Amazon is the largest online retailer, by far, and its growth is slowing fast and its sales visibility is disappearing just as fast.

image

Back to AMZN itself, our own experience at Christmas revealed that Amazon prices were no longer systematically the lowest. We bought many items elsewhere last year, sometimes with a pretty large price gap with Amazon. Also, Amazon customers are now paying sales taxes in just about every states, closing the price gap further. And now this:

To cover rising fuel and transport costs, the company is considering a $20 to $40 increase in the annual $79 fee it charges users of its “Prime” two-day shipping and online media service, considered instrumental to driving online purchases of both goods and digital media.

“Customers like the service, they’re using it a lot more, and so that’s the reason why we’re looking at the increase.” Confused smile

U.S. Pending Home Sales Hit By Winter Storms

The National Association of Realtors (NAR) reported that December pending sales of single-family homes plunged 8.7% m/m following a 0.3% slip in November, revised from a 0.2 rise. It was the seventh consecutive month of decline.

Home sales fell hard across the country last month. In the Northeast a 10.3% decline (-5.5% y/y) was logged but strength earlier in the year lifted the full year average by 6.2%. Sales out West declined 9.8% (-16.0% y/y) and for the full year fell 4.1%. Sales down South posted an 8.8% (-6.9 y/y) falloff but for all of 2013 were up 5.4%. In the Midwest, December sales were off 6.8% (6.9% y/y) yet surged 10.4% for the year.

Punch Haver’s headline suggests that weather was the main factor but sales were weak across the U.S. and have been weak for since the May taper announcement.

Mortgage Volumes Hit Five Year Low The volume of home mortgages originated during the fourth quarter fell to its lowest level in five years, according to an analysis published Thursday by Inside Mortgage Finance, an industry newsletter.

(…) Volumes tumbled by 19% in the third quarter, fell by another 34% in the fourth quarter, according to the tally. (…)

Overall originations in 2013 stood at nearly $1.9 trillion, down nearly 11% from 2012 but still the second best year for the industry since the mortgage bust deepened in 2008. The Mortgage Bankers Association forecasts originations will fall to $1.1 trillion, the lowest level in 14 years.

The report also showed that the nation’s largest lenders continued to account for a shrinking share of mortgage originations, at around 65.3% of all loans, down from over 90% in 2008.

Euro-Zone Inflation Returns to Record Low

Annual inflation rate falls to a record low in January, a development that will increase pressure on the ECB to act more decisively to head off the threat of falling prices.

The European Union’s statistics agency said Friday consumer prices rose by just 0.7% in the 12 months to January, down from an 0.8% annual rate of inflation in December, and further below the ECB’s target of just under 2.0%.

Excluding energy, prices rose 1.0%, while prices of food, alcohol and tobacco increased 1.7% and prices of services were 1.1% higher.

image

Pointing up Figures also released Friday showed retail sales fell 2.5% in Germany during December. The result was far worse than the unchanged reading expected from a Wall Street Journal poll of experts. In annual terms, retail sales fell 2.4%, the data showed. It was the first annual decline in German sales since June.

Consumer spending also fell in France as households cut purchases of clothes and accessories, although by a more modest 0.1%.

Benchmark Japan inflation rate hits 1.3%
December figure brings Bank of Japan closer to 2% goal

Average core inflation for all of 2013, a measure that excludes the volatile price of fresh food, was 0.4 per cent, according to the interior ministry. (…)

Much of the inflation so far has been the result of the precipitous fall in the yen that took hold in late 2012, making imports more expensive. Energy prices, in particular, have risen sharply: Japan buys virtually all of its oil and gas abroad, and the post-Fukushima shutdown of the country’s nuclear industry has further increased the need for fossil fuels.

So-called “core-core” consumer prices, which strip out the cost of both food and energy, rose by 0.7 per cent in December.

SENTIMENT WATCH

Individual Investors Head For the Hills

(…) In this week’s poll, bullish sentiment declined from 38.12% down to 32.18%.  This represents the fourth weekly decline in the five weeks since bullish sentiment peaked on 12/26/13 at 55.06%.  While bullish sentiment declined, the bearish camp became more crowded rising from 23.76% to 32.76%.  

With this week’s increase, bearish sentiment is now greater than bullish sentiment for the first time since mid-August.  The most interesting aspect about these two periods is what provoked the increase in cautiousness.  Back then it was concerns over Syria that were weighing on investor sentiment.  Fast forwarding to today, the big issue weighing on investors’ minds is now centered on Syria’s neighbor to the North (Turkey).  For such a small area of the world, this region continues to garners a lot of attention.

THE JANUARY BAROMETER (Contn’d) Sleepy smile

January Slump Is Nothing to Fret Over

The old Wall Street adage — as January goes, so goes the rest of the year – needs to be put to rest.

Since 1950, there have been 24 years in which the S&P 500 fell in January, according to Jonathan Krinsky, chief market technician at MKM Partners. While the S&P 500 finished 14 of those years in the red, a look at the performance from February through the end of the year provides evidence to buoy investors. In 13 of those 24 years, stocks rose over the final 11 months.

“All else being equal, a down January is less than 50% predictive that the rest of the year will close lower than where it closed in January,” Mr. Krinsky said. (…)

Long time reader Don M. sent me even better stuff on the January Barometer. Hanlon Investment Management must have had many clients asking about that since they made a thorough analysis of the “phenomenon”. Here it is for your Super Bowl conversation:

(…) What was found is that from 1950 until 1984, years where the month of January saw a positive return were predictive of a positive return for the entire year with approximately 90% probability.  The years with a negative return in January were predictive of a negative return for the year approximately 70% of the time. 

In the intervening time since 1984, market action has caused the predictive power of negative returns in January to fall to around 50%, which is nothing more than chance.  However, positive returns in January have still retained their predictive power for positive returns for the year.

Yet still, there is another group of people who advocate that just the first five trading days of January are predictive of the rest of the year.  We took data from 1950 through 2013 for the S&P 500 Index and then calculated both positive and negative results on a weekly and monthly basis.

For the 64 years from 1950 through 2013, a positive return in January was predictive of a positive return for the year 92.5% of the time.  A positive return during the first five trading days of January was predictive of a positive return for the year 90.0% of the time.  A negative return in January was predictive of a negative return for the year 54.2% of the time-basically not predictive at all.  A negative return during the first five trading days of January was predictive only 50% of the time, amounting to nothing more than a flip of a coin.

But what if we filter the results by requiring both a positive return during the first five trading days of January and a positive return in January for a positive signal?  Conversely, we may require a negative return during the first five trading days of January and a negative return for January to generate a negative signal.   When the first week and the month of January both have positive returns, then the signal is predictive 93.5% of the time for a positive year: a slight improvement over 92.5%.

Even more interesting is that when you require both a negative return in the first week and a negative return in January to give a signal.  Though the number of signals is reduced from 24 to 15, the success ratio improves from 54.2% to 73.3%.  The median and average returns for predicted years are listed in the summary statistics table, along with their respective success percentages, on the following page.  This will give you a something to ponder as we begin 2014.

How about negative first week and positive month? And what’s wrong with the last five days of January? Then insert the result of the Super Bowl. There you go!

Thanks Don.

Investors pull billions from EM stocks Dedicated EM funds hit as equity outflows reach highest since 2011 (Via FT Alphaville)

SocGen’s cross-asset research team believes that when it comes to EM outflows they may have only just begun:

As the team notes on Friday, this is especially so given the Fed doesn’t appear to care about the EM sell-off:

Since cumulative inflows into EM equity funds reached a peak of $220bn in February last year, $60bn of funds have fled elsewhere. Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity (see chart below). EM bond funds face a similar fate. For reasons discussed in our latest Multi Asset Snapshot (EM assets still at risk – don’t catch the falling knife), we see no early end to EM asset de-rating. Furthermore, the Fed remains assertive on execution of tapering despite recent turmoil within the EM world, which spells more turbulence ahead.

And if it keeps going, balance of payments issues could emerge as a result:

A close look at Global EM funds indicates that all EM markets are suffering outflows Mutual fund and ETF investors in EMs both favour global EM funds. Regional or country specialisation is less common (less than 47% of global EM assets). The implication is that all EM markets face outflows currently, with little discrimination between the countries that are most exposed and those which are more defensive. We think Balance of Payment issues may emerge as an important factor going forward.

Though, what is EM’s loss seems to be Europe’s gain at the moment:

Europe reaps the benefits While current EM volatility is impacting developed markets as well, some of the flows are being redirected toward Europe, notably into Italy, Spain and the UK.

The notable difference with taper tantrum V.2, of course, is that US yields are compressing:

Which might suggest that what the market got really wrong during taper tantrum V.1, was that a reduction in QE would cause a US bond apocalypse. This was a major misreading of the underlying fundamentals and tantamount to some in the market giving away top-quality yield to those who knew better.

Taper at its heart is disinflationary for the US economy, and any yield sell-off makes the relative real returns associated with US bonds more appealing.

That taper V.2 incentivises capital back into the US, at the cost of riskier EM yields, consequently makes a lot of sense.

Though, this will become a problem for the US if the disinflationary pressure gets too big.

 

NEW$ & VIEW$ (23 JANUARY 2014)

EMPLOYMENT SUPPLY/DEMAND (Cont’d)

Lance Roberts points out the jump in the Quits/Layoffs ratio which also suggests un tight supply/demand balance.

“Quits are generally voluntary separations initiated by employees. Quits are procyclical, rising with an improving economy and falling with a faltering economy. Layoffs and discharges are generally involuntary separations initiated by an employer and are countercyclical, moving in the opposite direction of quits. The ratio of the number of quits to the number of layoffs and discharges provides insight into churn in the labor market over the business cycle.

 
Boost for Spain as unemployment dips
Latest sign pointing to a nascent economic recovery

The number of unemployed people in Spain dropped slightly in the final quarter of last year, the first such fall in a decade and the latest in a series of broadly encouraging signs that point towards a nascent economic recovery in the country.

The data, contained in a labour market survey released on Thursday, are likely to bolster confidence in the Spanish economy at a time when investors are piling into the country’s sovereign debt and other assets on a scale not seen since the start of the crisis.

S Korea records fastest growth in 3 years
Robust domestic demand powers strong growth

Gross domestic product rose by 3.9 per cent in the last three months of 2013 from a year earlier, broadly in line with economists’ forecasts. In a break from the trend of recent years, the contribution to growth of domestic demand – or total purchases of goods and services – outstripped that of exports, the Bank of Korea said on Thursday.

However, confidence in South Korea is tightly linked to exports, which account for more than half of GDP, and economists said the improved domestic demand was based on growing faith in the strength of the global recovery, with South Korean exports growing 4.3 per cent last year. (…)

Companies’ investment in machinery and transport equipment fell heavily over most of the past two years, reflecting nervousness among manufacturers about overseas demand. But it rose by an annual 9.9 per cent in the fourth quarter, and this rebound was set to continue into the new year, said Kwon Young-sun, an economist at Nomura. (…)

Dollar sinks below 90¢ as Poloz ‘declares open season on loonie’

(…) Yesterday, it plunged below 91 cents U.S. after the Bank of Canada released its rate decision and monetary policy report that, over all, suggests interest rates aren’t going anywhere at any time soon because of its focus on stubbornly low inflation.

Pointing up Coupled with that was a line in the report that warned the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports” even with its stunning loss over the past year.

“Until today, the Bank of Canada had been careful not to open talk down the loonie,” chief economist Douglas Porter of BMO Nesbitt Burns said late yesterday in a research note titled “BoC declares open season on loonie.”

“They effectively gave sellers the green light in today’s monetary policy report by stating that even with the big drop in recent weeks, it remained high and would still ‘pose a competitiveness challenge for Canada’s non-commodity exports,” he added. (…)

Some observers also believe that this is a deliberate move by Canadian policy makers to devalue the currency in a bid to boost the country’s exports, as a weaker loonie lowers the cost of Canadian goods in the United States.

The Bank of Canada denies any such thing, but everyone agrees that Mr. Poloz, while not driving down the dollar, is pleased with the outcome. (…)

THE BoC DOES NOT NEED TO CUT RATES
 

In Canada, low inflation and disappointing job creation have prompted many to ask whether the Bank of Canada (BoC) will need to ease in 2014. At this writing the OIS market is putting the odds of a rate cut by September at 33%. The question is legitimate, but we think the depreciation of the Canadian dollar is doing the job for the Bank.

An old rule of thumb was that a 10% depreciation of the Canadian dollar would add 1.5% to GDP over time. That was when the penetration of
Canadian exports in the U.S. market was stronger. Our share of U.S. imports has been declining since even before the last recession. Moreover, Canadian manufacturing capacity has shrunk as producers have restructured their operations in the wake of the Great Recession. So that rule of thumb is surely too optimistic by now.

Yet even if the impact of the exchange rate on the economy were only a third of what it used to be, the 9.5% drop in the effective exchange rate since January 2013, if sustained, would over time add 0.4% to GDP. As
today’s Hot Chart shows, that is probably as large a boost to the economy as would be expected from a BoC rate cut of 50 to 75 basis points. (NBF)

image
 
Rouhani outlines growth plan for Iran
President calls for greater engagement with rest of the world

Hassan Rouhani, president of Iran, on Thursday predicted that his country had the potential to be one of the world’s top 10 economies in the next three decades if sanctions were lifted and economic ties normalised.

In an upbeat and conciliatory speech at the World Economic Forum in Davos, Mr Rouhani reiterated that developing nuclear weapons “has no place in Iran‘s security strategy” and forecast that ties with Europe would be “normalised” as the interim nuclear agreement is implemented.

Mr Rouhani said he intended to remove “all political and economic impediments to growth” in Iran and that one of his priorities was “constructive engagement with the world”. (…)

For its part, Iran intends to “reopen trade, industrial and economic relations with all of our neighbours”, he said, naming Turkey, Iraq, Russia, Pakistan, Afghanistan and Central Asia. (…)

Iran’s economy shrank more than 5 per cent in the last fiscal year as international sanctions imposed in response to the country’s nuclear programme took their toll. (…)

Benjamin Netanyahu, the Israeli prime minister, who is due to address the forum later on Thursday, described the speech as a continuation of “the Iranian campaign of deception”.

In a long post on his Facebook page he warned: “The international community mustn’t fall for this deception once again, and it must prevent Iran from being capable of manufacturing nuclear weapons.” (…)

SMALL IS BEAUTIFUL?

Chart from Citi Research (via ZeroHedge)

BUYBACKS BACK PRICE GAINS

Investing in the 100 stocks with the highest buyback ratios had a 49 percent total return for 2013. The S&P 500 Index gained 32 percent, and the CDX High Yield Index returned about 14 percent, including the 5 percent coupon. (BloombergBriefs)

image

EARNINGS WATCH

Bespoke give us its tally of all NYSE companies:

Earnings and Revenue Beat Rates Decent So Far

Of the 121 companies that have released earnings since the Q4 2013 reporting period began, 68% have beaten bottom-line EPS estimates.  As you can see, 68% would be a strong reading if it holds. Keep in mind that it’s still very early, though.  More than 1,000 companies are set to report over the next few weeks, so the beat rate could fluctuate a lot.

Top-line sales numbers have been a little less rosy than the more-easily manipulated bottom-line numbers.  As shown in the second chart below, 57% of companies have beaten revenue estimates so far this season.  While this isn’t a stellar reading, it is better than all but one of the earnings seasons we’ve had since the start of 2012. 


CFOs Warn Investors on Impact of Expired R&D Tax Credit

Companies are flagging investors they may face higher tax rates this year because the U.S. tax credit they use to offset some research and development expenses expired at the end of last year.

As first quarter conference calls get going, companies ranging from Johnson & Johnson to Textron Inc. are providing detailed information about the missing credit. While chief financial officers widely expect Congress to reinstate the credit, companies cannot factor in the tax credit into their financial results unless it is current law.

Companies, including Johnson & Johnson, are warning the lapsed tax credit for research and development could boost their tax rate.

The impact for many companies could be significant. Because the credit was retroactively extended for 2012 at the beginning of 2013, many companies recognized five quarters of tax credits in the first quarter of last year, but will recognize zero in the first quarter of 2014. (…)

While the credit often expires and is retroactively enacted, Congress has only once allowed it to lapse completely in 33 years. Some companies are confident enough to continue giving financial guidance with the assumption it will be extended, while others are hedging their bets. (…)

 

NEW$ & VIEW$ (6 JANUARY 2014)

Auto U.S. car sales from different prisms:

 

  • Auto Makers Rebound as Buyers Go Big 

    Five years after skyrocketing fuel prices and turmoil in financial markets knocked auto makers into a tailspin, the U.S. market has recovered to its former size and character.

(…) U.S. car and light truck sales rose less than 1% in December, reflecting in part a hangover from a surge the month before. But overall, the U.S. auto industry in 2013 had its best sales year since 2007, and industry executives said on Friday they expect gains to continue in 2014, though at a slower pace.

For the year, U.S. consumers bought 15.6 million vehicles, up 7.6% from 2012, according to market researcher Autodata Corp., the strongest volume since 2007. Purchases of light trucks including sport-utility vehicles exceeded cars, a reversal from the year earlier. (…)

But as gas prices drifted lower last year, U.S. consumers trading old vehicles for new favored pricey pickup trucks, SUVs and luxury cars. Ford, for example, boosted sales of its F-150 pickup by 8.4% in December over a year ago, while sales of its subcompact Fiesta and compact Focus cars plunged by 20% and 31% respectively. (…)

Consumers also are springing for more luxurious models, driving average new-car selling price to $32,077 in 2013, up 1.4% from a year earlier and up 10% from 2005, according to auto-price researcher KBB.com. (…)

High five December points to slower growth ahead as auto makers found gains harder to achieve against year-earlier results.

GM said its December sales fell 6.3% compared with the same month last year because of what executives said were aggressive pickup truck promotions by Ford and tougher competition from Asian auto makers.

December also marked the first monthly year-over-year decline in car sales at GM, Ford and Chrysler for 2013. Gains in pickups and SUVs offset weaker car sales at Ford and Chrysler. (…)

  • Here’s the monthly sales pattern (WardsAuto):

An expected post-Christmas surge in LV sales failed to materialize, as U.S. automakers reported 1.35 million monthly sales – an increase in daily sales of 4%. December devliveries equated to a 15.3 million-unit SAAR for the month.

ZeroHedge zeroes in on domestic car sales:

 

Via SMRA,

Nearly every automaker has reported lower-than-expected sales for the month of December relative to our forecast and the consensus. At this time, domestic light vehicle sales are running at a disappointing low 11.3 million annualized pace, which compares with 12.6 million for November.

If taken into context, we can say that the strong selling pace in November pulled sales away from December. In September and October, domestic light vehicle sales fell under 12.0 million due to the impact of the federal government shutdown, slipping to 11.7 million for both months, as it negatively impacted on buying confidence.

In November 2013, sales recovered strongly to 12.6 million, perhaps too strongly to the detriment of December’s sales. Therefore, if we average November and December together, we get 12.0 million, which is a respectable, though not spectacular, selling pace.

The times, they are a-changing:

image

Hmmm…

Total car sales using a 3-month m.a. to smooth out monthly fluctuations.

image

Girl “Daddy, is this a cyclical peak?”

image

Just kidding “May well be, but let’s hope not…”

 

From my Nov. 20 post:

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers.

Truth is, basic demand seems to be soft:

Americans Holding on to Their Cars Longer

Demand for cars has been helped by the aging of America’s vehicles.

(…) during the 2007-2009 downturn and after, financial problems and tight credit standards prevented many consumers from replacing their old vehicles. As a result, estimate analysts at IHS Automotive, the average age of a vehicle stands at a record 11.3 years. The average age increased faster in the five years ended in 2013, than in the five years before that. The trend is true for cars and for light trucks.

(…) IHS projects vehicle sales will total just over 16 million in 2014, and the new cars will help to slow the aging of America’s car fleet.

Truth is that cars do last longer.

And seems that people want, need or can only afford fewer cars (chart from ZeroHedge)

Cases in point:

Office-Rental Market Is Gaining Strength

(…) Businesses occupied an additional 8.5 million square feet of office space in the quarter. That was only a 0.25% increase from the third quarter, but Reis said it was the largest gain since the third quarter of 2007.

The expansion of tenants was offset by the completion of 9.1 million square feet of new office space during the quarter, the most since the fourth quarter of 2009, according to Reis, which tracks 79 major U.S. office markets. That left the market’s vacancy rate at 16.9%, unchanged from the previous quarter.

The vacancy rate had been steadily falling from the recent high of 17.6% in early 2011, but it still is well above the low of 12.5% in the third quarter of 2007, Reis said.

The amount of occupied office space now stands at slightly more than 3.4 billion square feet, which falls short of the market’s peak in late 2007 by 79 million square feet.

At the current rate that companies are leasing new offices—known as “positive absorption”—it would take more than two years to reach that peak level again.

(…)  Average asking rents increased in the fourth quarter to $29.07 per square foot a year, up 0.7% from the third quarter but still short of the recent high of $29.37 hit in 2008. (…)

Economic research firm Moody’s Analytics projects office-using jobs will increase 2.1% this year to nearly 33.9 million. That growth rate, along with a 2.1% gain in 2012, are the largest since last decade’s boom. “I would expect 2014 to be the best year since 2006 for office-using jobs,” says Mark Zandi, chief economist at Moody’s Analytics.

Reis’ preliminary forecast for 2014 calls for office-vacancy rates to decline by roughly half a percentage point by year’s end and asking rents to increase 2.8%, the largest gain since 2007. (…)

Alien ‘Polar Pig’ Threatens Coldest U.S. Weather in Two Decades

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite energy demand and damage Great Plains winter wheat.

Hard-freeze warnings and watches, which are alerts for farmers, stretch from Texas to central Florida. Mike Musher, a meteorologist with the U.S. Weather Prediction Center in College Park,Maryland, said 90 percent of the contiguous U.S. will be at or below the freezing mark today.

Freezing temperatures spur energy demand as people turn up thermostats to heat homes and businesses. Power generation accounts for 32 percent of U.S. natural-gas use, according to the Energy Information Administration. About 49 percent of all homes use the fuel for heating.

China Shows Signs of Slowdown

Four purchasing managers’ indexes—two compiled by the government and two by HSBC Holdings PLC all dropped last month, the first time that has happened since April. The HSBC Services PMI, released Monday, fell to 50.9 for December, compared with 52.5 the month before. (…)

All four PMIs remained in narrowly positive territory for December, indicating that expansion continues, albeit at a slow pace. But that masks difficulties for individual companies in some sectors. Conditions are worsening for small and medium-size businesses, according to the official manufacturing PMI. The subindex for large companies, which has performed best in recent months, also fell in December, though it remains above the 50 mark that separates growth from contraction.

The data show manufacturers cut back stocks of both raw materials and finished goods, suggesting they are expecting weaker sales ahead. (…)

GUIDANCE ON GUIDANCE

This is what the media have been posting from Factset in recent weeks:

For Q4 2013, 94 companies in the S&P 500 have issued negative EPS guidance and 13 companies have issued positive EPS guidance. If these are the final numbers, it will mark the highest number of companies issuing negative EPS guidance and tie the mark for the lowest number of companies issuing positive EPS guidance since FactSet began tracking the data in 2006.

The percentage of companies issuing negative EPS guidance is 88% (94 out of 107). If this is the final percentage for the quarter, it will mark the highest percentage on record (since 2006).

These following info from the same Factset release have generally been omitted by the media:

Although the number of companies that have issued negative EPS guidance is high, the amount by which these have companies have lowered expectations has been below average. For the 107 companies in
the S&P 500 that have issued EPS guidance for the third quarter, the EPS guidance has been 5.7% below the mean estimate on average. This percentage decline is smaller than the trailing 5-year average of -11.1% and trailing 5-year median of -7.8% for the index. If -5.7% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q2 2012 (-0.4%).

That could mean that companies are more prone to reduce guidance than before. Here’s what has happened following Q3 guidance:

At this point in time, all 114 of the companies that issued EPS guidance for Q3 2013 have reported actual results for the quarter. Of these 114 companies, 84% reported actual EPS above guidance, 9% reported
actual EPS below guidance, and 7% reported actual EPS in line with guidance. This percentage (84%) is well above the trailing 5-year average for companies issuing EPS guidance, and above the overall performance of the S&P 500 for Q2 2013.

Under-promise to over-deliver!

Companies that issued quarterly EPS guidance for Q3 reported an actual EPS number that was 9.5% above the guidance, on average. Over the past five years, companies that issued quarterly EPS guidance reported an actual EPS number that was 12.8% above the EPS guidance on average.

Now this:

For the current fiscal year, 149 companies have issued negative EPS guidance and 116 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 56% (149 out of 265), which is below the percentage recorded at the end of September (61%).

Since the end of September, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by eight, while the
number of companies issuing positive EPS guidance has increased by 15.

Pointing up There was a 15% increase in the number of companies issuing positive EPS guidance from the end of September through the end of December.

As a result:

Over the course of the fourth quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 3.5% (to $27.90 from $28.91) from September 30 through December 31.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 3.9%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 5.8%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.3%. Thus, the decline in the EPS estimate recorded during the course of the Q4 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

So, do you really want to use forward earnings in your valuation work?

Bernanke Kicks Off Farewell Tour In Philly. Some of his comments:

  • I have done my job:

At the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.

  • Politicians have not:

Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.

  • So get to it now:

But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth.

  • That’s for you bankers as well:

The Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates;

  • Get ready for higher rates:

in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the (Fed) will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate. It is possible, however, that some specific aspects of the Federal Reserve’s operating framework will change; the Committee will be considering this question in the future, taking into account what it learned from its experience with an expanded balance sheet and new tools for managing interest rates.

Need more warning?

 

Fed’s Plosser: May Need to Employ Aggressive Tightening Campaign

(…) Mr. Plosser, who spoke as part of a panel discussion held in Philadelphia at the annual American Economic Association, will be a voting member of the monetary policy setting Federal Open Market Committee this year. (…)

Currently, the Fed expects to keep short-term rates very low until some time in 2015. The veteran central banker is uneasy with that, and warns the Fed should prepare for a faster and more aggressive campaign of rate hikes given the inflation risks presented by all the liquidity it has provided markets.

Mr. Plosser said the Fed would like to raise rates “gradually” but added “it doesn’t always work that way.”

“How fast will we have to move interest rates up…we don’t know the answer to that,” Mr. Plosser said. He warned that the Fed may have to be “aggressive,” and he added “people like to think the Fed has all this great control over interest rates, but the market does its own thing.”

JPMorgan Shows The US Is The Most Expensive Developed Market In The World

JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…

Punch By the way, this also impacts employment:

Foreign Companies Investing Less in the U.S.

Obama has made reversing the trend a priority.

Foreign direct investment in the U.S. appears to have dropped 11% last year, to about $148 billion, according to preliminary Commerce Department data, as analyzed by the Congressional Research Service.

This follows a decline in 2012 to about $166 billion from 2011’s estimated $230 billion. Foreign direct investment, or FDI, had peaked in the U.S. at $310 billion in 2008 and sank to about $150 billion in 2009, before rebounding in 2010 to $206 billion.

The steep fall in 2012-2013 has many possible causes, including the heated presidential elections and the knockdown, drag-out budget battles that culminated in last year’s government shutdown. Our politics frighten foreigners. We also saw tougher air-quality regulations from the Environmental Protection Agency and the new Dodd-Frank rules. Nevertheless, the U.S. last year emerged for the first time since 2001 as the most promising destination for FDI, thanks to our productivity gains, according to a survey of 302 companies from 28 countries by A.T. Kearney, a New York international consulting firm.

Obama seems to be in the mean-reverting biz now with many priorities aimed at reversing trends…(see below)

Stock Buybacks’ Allure Likely to Fade

(…) In the fourth quarter, S&P 500 companies may have bought back nearly $138 billion worth of stock, says Howard Silverblatt, Standard & Poor’s senior analyst. If that estimate proves correct as companies file their quarterly disclosures, it’ll be the biggest quarter for buybacks since 2007 and a 40% jump from the level a year ago.

Companies have already repurchased a staggering $445 billion worth of shares in the 12 months ended on Sept. 30. (…)

The S&P 500 Buyback Index, which covers the 100 companies that are the busiest buying back shares, rose 48.3% in 2013, trumping a 33.3% return for even the S&P Dividend Aristocrat Index brimming with companies that have hiked dividends every year for a quarter-century.

Conventional wisdom now expects 2014 to be an even bigger year for buybacks. After all, global growth is improving at only a drowsy pace, and receding crises heap pressure on management to spend their cash stash. Goldman Sachs, for one, sees repurchases increasing 35% this year.

(…) Rising interest rates will make it dearer for companies looking to borrow to finance buybacks or replenish their cash hoards. (…)

Besides, buybacks work better as an interim measure for returning cash to shareholders when the outlook is iffy. Today, a broadening recovery nudges management to rely less on financial engineering and to begin the riskier, tougher task of finding growth, investing in research and development, or inventing the next big thing—whether it’s ocean-driven hydropower or a cure for male-pattern baldness. Reflexively buying back shares was the easy, momentarily crowd-pleasing part. Figuring out where future growth lies and how to secure it is the real challenge that lies ahead.

BANKS

 

Biggest Lenders Keep On Growing

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial.

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial. That expansion has been reshaping banking since at least 1990, when the top five institutions held 9.67% of bank assets. (…)

At the same time, the number of U.S. banks fell last year to the lowest level since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

There were 6,891 banks as of the third quarter, down from a peak of 18,000. Between 1984 and 2011, more than 10,000 banks disappeared through mergers or failures, according to FDIC data.

The banking units of J.P. Morgan Chase, Bank of America Corp., Citigroup Inc., Wells Fargo and U.S. Bancorp held $6.46 trillion in assets as of the third quarter, the report, released Thursday by SNL, found. The total for the rest of the banking industry, comprised of thousands of midsize, regional and smaller players, was $8.15 trillion.

Meanwhile.

Sarcastic smile Barack Obama has played 160 rounds of golf since taking office. (Time). That’s 32 per year over the past 5 years.

 

NEW$ & VIEW$ (16 DECEMBER 2013)

U.S. Producer Prices Fall 0.1%

The producer-price index, which measures what firms pay for everything from lumber to light trucks, fell 0.1% from October, the Labor Department said Friday. That marked the third straight monthly decline, owing largely to a fall in gasoline costs from the summer. Excluding food and energy, “core” prices rose 0.1% in November after climbing 0.2% in October.

Compared with a year earlier, overall prices were up 0.7% in November, more than double the pace of the prior two months. Core prices climbed 1.3% in November from a year earlier after rising 1.4% year-over-year in October.

Half of U.S. Lives in Household Getting Benefits  The share of Americans living with someone receiving government benefits continued to rise well into the economic recovery, reflecting a weak labor market that pushed more families onto food stamps, Medicaid or other programs.

Nearly half of the U.S., or 49.2% of the population, live in a household that received government benefits in the fourth quarter of 2011, up from 45.3% three years earlier, the Census Bureau said.

Government benefits as defined by Census include Medicaid, Medicare, Social Security, food stamps, unemployment insurance, disability pay, workers’ compensation and other programs.

Part of the increase comes from an aging population, with the 16.4% of the population living in a household where someone gets Social Security and 15.1% where someone receives Medicare. That was up from 15.3% and 14%, respectively, at the end of 2008.

But the biggest increases were in benefits aimed at helping the poor. The program experiencing the sharpest rise in participation was food stamps, officially known as the Supplemental Nutrition Assistance Program. About 16% of people lived in a household where someone was receiving SNAP benefits, up from just 11.4% at the end of 2008.

Participation in Medicaid, the government health-insurance program for the poor and disabled, also climbed. At the end of 2011, 26.9% of the population was living in a household where at least one member was receiving Medicaid benefits, up from 23.7% three years earlier.

(…) unemployment compensation is one of the smaller pieces of the safety net. The Census report showed 1.7% of people lived in households where someone was collecting unemployment compensation in the final quarter of 2011 up a bit from 1.4% in 2008.

Canadian Housing: The Bubble Debate

It is always difficult to spot a speculative bubble in advance, but in the case of Canadian housing the weight of evidence is clear in our view: Canada Housing Bubble

  • Price level: The IMF highlighted recently that Canada tops the list of the most expensive homes in the world, based on the house-to-rent ratio.
  • Broad Based: Real home prices have surged in every major Canadian city since 2000, not just in Toronto and Vancouver.
  • Over-Investment: Residential investment has risen to 7% of GDP, above the peak in the U.S. and far outpacing population growth.
  • High Debt: Household debt now stands at nearly 100% of GDP, on par with the U.S. at the peak of its housing boom. The increase in household debt as a percent of GDP since 2006 has been faster in Canada than anywhere else in the world, according to the World Bank.
  • Excessive Consumption: The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.

The IMF and the BoC have argued that the air can be let out of the market slowly. But, as the old cliché goes, bubbles seldom end with a whimper. What could spoil the party? Higher interest rates are a logical candidate for ending the housing boom.

EARNINGS WATCH 

This Thomson Reuters chart has been around a lot lately, generally on its own, being apparently self-explicit.

ER_1209

The chart deserves some explanations, however:

  • The reason the ratio is so high currently is not really because many more companies have decreased guidance but rather because very few have raised it.

Over the past four quarters (Q412 – Q313), 86 companies on average have issued negative EPS guidance and 26 companies on average have issued positive EPS guidance. Thus, the number of companies issuing negative EPS guidance for Q4 is up only 3% compared to the one-year average, while the number of companies issuing positive EPS guidance for Q4 is down 54% compared to the one-year average. (Factset)

  • The chart uses Thomson Reuters data which seems to be the most negative among aggregators. Factset data show a negative/positive ratio of 7.8x. The ratio has deteriorated from 7.4x the previous week, however, as 5 more companies have issued negative guidance against zero positive.

(…) a record-high 94 companies in the S&P 500 index already have done so for the current quarter. Conversely, a record-low 12 have said they would do better. That ratio of 7.83 negative-to-positive warnings dwarfs any quarter going back to 2006, when FactSet began tracking such data.

  • So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.
  • In small and mid-cap stocks, the trend appears much less gloomy. Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The bulk of negative preannouncements is in IT and Consumer Discretionary sectors which have also recorded the largest increase in negative preannouncements in recent weeks.image

In spite of the above, earnings estimates are not cut. Q4 estimates (as per S&P) are now $28.41 ($28.45 last week) while 2014 estimates have been shaved $0.13 to $122.42, up 13.8% YoY. Actually, 2014 estimates have increased 0.4% since September 30.

THE CHRISTMAS RALLY

This is December over the past ten years (Ryan Detrick, Senior Technical Strategist, Shaeffer’s Investment Research)

Is Santa Coming This Year?

Wait, wait!

Bespoke Investment suggests the market is oversold:

(…) Below is a one-year trading range chart of the S&P 500.  The blue shading represents between one standard deviation above and below its 50-day moving average (white line).  The red zone is between one and two standard deviations above the 50-day, and moves into or above this area are considered overbought.  As shown, after trading in overbought territory since October, the S&P has finally pulled back into its “normal” trading range this week.  Technicians will be looking for the 50-day to act as support in the near term if the index trades down to it.  A break below means we’ll potentially see a close in oversold territory for the first time since June.  

While the S&P 500 is just above its 50-day in terms of price, its 10-day advance/decline line is indeed oversold.  The 10-day A/D line measures the average number of daily advancers minus decliners in the index over the last 10 trading days.  This provides a good reading on short-term breadth levels.  The oversold reading in place right now means the last ten days have not been kind to market bulls.  Over the last year, however, moves into the green zone have been good buying opportunities.

Gift with a bow  And here’s your Christmas present:

The Santa Claus Rally Season Is About To Begin (crossingwallstreet.com/)

I took all of the historical data for the Dow Jones from 1896 through 2010 and found that the streak from December 22nd to January 6th is the best time of the year for stocks. (December 21st and January 7th have also been positive days for the market but only by a tiny bit.)

Over the 16-day run from December 22nd to January 6th, the Dow has gained an average of 3.23%. That’s 41% of the Dow’s average annual gain of 7.87% occurring over less than 5% of the year. (It’s really even less than 5% since the market is always closed on December 25th and January 1st. The Santa Claus Stretch has made up just 3.8% of all trading days.)

Here’s a look at the Dow’s average performance in December and January (December 21st is based at 100):

You should note how small the vertical axis is. Ultimately, we’re not talking about a very large move.

May I remind you that you can get all the dope on monthly stock returns in the “MARKET SMARTS” section of my sidebar. Here are the two charts that matter:

This is the simplified chart from RBC Capital Markets

image

Here is Doug Short’s:

WANT MORE?

Buy The “December Triple Witching” Dip (BofAML via ZeroHedge),

This Friday is December Triple Witching (the term used for the quarterly expiry of US equity index futures, options on equity index futures and equity options). Consistently the week of December Triple Witching is one strongest of the year for the S&P500. In the 31 years since the creation of equity index futures, the S&P500 has risen 74% of the time during this week. More recently, it has risen in ten of the past 12 years. With equity volatility fast approaching a buy signal, the conditions are growing ripe for an end to the month long range trade and resumption of the larger bull trend (we target 1840/1850 into year-end).

 
SENTIMENT WATCH
 

General Electric to raise dividend 16%  Largest increase by US manufacturing group since 2010

Hunger Grows for U.S. Corporate Bonds

Investors are buying new U.S. corporate bonds at a record pace, and demanding the smallest interest-rate premium to comparable government bonds since 2007.

imageDemand has also put sales of new junk-rated corporate bonds in the U.S. on pace to surpass last year’s record. Sales of investment-grade bonds in the U.S. this year are already at the highest ever, according to data provider Dealogic. (…)

The narrowest reading for investment-grade corporate-bond spreads in recent years came in 2005, when the gap hit 0.75 percentage point. (…)

According to Moody’s Investors Service, the default rate for below-investment-grade companies in the U.S. was 2.4% in November, down from 3.1% a year earlier. (…)

Meanwhile:

U.S. Rate Rise Sends High-Dividend Stocks Lower

The Dow Jones U.S. Select Dividend Index has lagged behind the Standard & Poor’s 500 Total Return Index by 4.6 percentage points on a total-return basis since April 30. During the same period, the yield on 10-year U.S. Treasuries has risen to 2.88 percent from 1.67 percent. The dividend group fell to its lowest level in more than a year Dec. 11 relative to the broader gauge.

BARRON’S COVER

An Upbeat View of 2014 Wall Street strategists expect stocks to rise 10%, boosted by a stronger economy and fatter corporate profits. Bullish on tech, industrials.

THE 10 STRATEGISTS Barron’s consulted about the outlook for 2014 have year-end targets for the S&P of 1900 to 2100, well above Friday’s close of 1775.32; their mean prediction is 1977.

(…) the strategists expect earnings growth to do the heavy lifting, with S&P profits climbing 9%, compared with subpar gains of 5% in the past few years.

Specifically, the strategists eye S&P profits of $118, up from this year’s estimated $108 to $109. Industry analysts typically have higher forecasts; their 2014 consensus is $122, according to Yardeni Research.

The consensus view is that yields on 10-year Treasury bonds will climb to 3.4% next year from a current 2.8%. Our panel’s predictions on year-end yields for the 10-year bond range widely, from 2.9% to 3.75%.

(…) corporations are sitting on $1 trillion of cash, and there is pent-up demand for investment around the world. Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase, notes that U.S. gross fixed investment has fallen to 13% of GDP, on par with Greece and well below the 16% to 21% range that obtained from 1950 to 2007. Just getting back to the midpoint of that range would require additional spending of $600 billion, he observes. (…)

The calendar, too, is a help. Addition will come from subtraction as the U.S. begins to lap some of the government’s automatic spending cuts tied to the sequestration that began last spring, and the expiration of the Obama administration’s 2% payroll-tax cut early this year. The government cost the economy perhaps 1.5 percentage points of GDP growth in 2013, but “government drag will be a lot less in 2014,” predicts Auth.

Both people and companies will start to spend more in 2014, he adds.

How to be right, whatever happens;

Time to Brace for a 20% Correction Ned Davis Research expects a 2014 buying opportunity. How to play the decline-and-recovery scenario.

Davis: Right now, about 78% of industry groups are in healthy uptrends. That would have to fall to about 60% for us to say the market had lost upside momentum. We also focus on the Federal Reserve, and it’s still in a very easy mode, despite all the talk about tapering. So, those two indicators are bullish. However, we’ve looked at all the bear markets since 1956 and found seven associated with an inverted yield curve [in which short-term interest rates are higher than long ones] — a classic sign of Fed tightening. Those declines lasted well over a year and took the market down 34%, on average. Several other bear markets took place without an inverted yield curve, and the average loss there was about 19% in 143 market days. We don’t see an inverted yield curve anytime soon. So, whatever correction we get next year is more likely to be in the 20% range.

We also looked at midterm-election years — the second year of a presidential term, like the one coming up in 2014 — going back to 1934, and the average decline in those years was 21%. But after the low was hit in those years, the market, on average, gained 60% over two years. So, a correction should be followed by a great buying opportunity. (…)

Hedge Funds Underperform The S&P For The 5th Year In A Row

The $2.5 trillion hedge-fund industry is headed for its worst annual performance relative to U.S. stocks since at least 2005. As Bloomberg Brief reports, the funds returned 7.1% in 2013 through November; that’s 22 percentage points less than the 29.1% return of the S&P 500, with reinvested dividends, as markets rallied to records. Hedge funds are underperforming the benchmark U.S. index for the fifth year in a row as the Fed’s inexorable liquidity pushes equity markets higher (and the only way to outperform is throw every risk model out the window). Hedge funds (in aggregate) have underperformed the S&P 500 by 97 percentage points since the end of 2008.

Light bulb  Hence the new marketing stance:

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.” (FT)

Winking smile  NEXT JOB FOR BERNANKE  China’s Smog Forces Pilots to Train for Blind Landings

 

NEW$ & VIEW$ (12 DECEMBER 2013)

Budget Deal Picks Up Steam House Republican leaders threw their weight behind a two-year budget deal, planning to bring it to a vote Thursday as opposition in both parties failed to gain enough traction to threaten passage.

HOUSING WATCH

Homebuilders continue to digest Toll Brothers’ (TOL -1.8%) “leveling in demand”comments from yesterday’s earnings results – in the 19 weeks since August 1, business has been flat vs. last year, and in the first 5 weeks of FQ1 (beginning Nov. 1) business has also been flat from 2012 (though Hurricane Sandy makes a tricky comparison). (SA)

Pointing up Storm cloud  Container Exports at Lowest Point in Four Years; Imports Slow Against Growing Inventories

The month of November saw U.S. ocean container exports hit their lowest point since January 2010, when our Index begins. The November export index registered .934, compared to our baseline of 1.0 in January 2010. This is only the second time that the export index has fallen below 1.0. Imports were stronger than in two of the previous three years, but dropped 6.1 percent from October to November, a period where we have typically seen increases.

image

Interestingly, volumes declined almost across the board for the 25 destination countries included in the export index. Matching our data, many of the nation’s ports are reporting drops in the number of
containers handled. Production of automotive and related products
slowed in November because of falling domestic and foreign demand, which in turn reduced shipments of parts and finished goods.

Container imports fell for the third month in a row, dropping 6.1 percent in November. What amounted to a peak season “bump” in July and August has given way to a steady decline in imports since. This is not unusual for November, and is by far not the worst November showing
since 2010. Retail and wholesale inventories have reached levels above
their pre‐recession highs without the spending activity to support the
growth.

image

Hmmm…

Euro-Zone Industrial Output Falls

The European Union’s statistics agency said industrial production was 1.1% lower than in September, the second straight month of decline and the sharpest drop since September 2012. The decline was spread across most of the currency area, with only Italy and Estonia recording increases in output.

Surprised smile  The decline in output came as a surprise, with 24 economists surveyed by The Wall Street Journal last week having estimated that output rose by 0.2% during the month. It raises the possibility that the euro zone’s return to growth may come to a halt in the final quarter of this year, having already weakened in the third quarter. (…)

The decline in industrial output was led by the energy sector, which recorded a 4% drop in production during October. That wasn’t a great surprise, given that temperatures across Europe were higher than usual during that month. However, output of capital goods fell by 1.3%, while output of consumer durables fell by 2.4% and of non-durables by 0.9%.

That suggests the drop in production was a response to weak demand from businesses and consumers. Figures released last week showed retail sales in the euro zone fell in October, while a November survey of consumers recorded the first decline in confidence this year.

Stock Surge Fuels Pensions

A roaring stock market and rising interest rates are fueling the strongest recovery in the $2.4 trillion U.S. corporate-pension sector in more than a quarter-century.

Investments in the average company’s pension plan are expected to be at levels that cover 96% of future obligations at the end of the year, according to a new estimate by J.P. Morgan Chase & Co. A separate analysis by Milliman Inc., which provides actuarial products and services, puts the figure above 94%, while pension specialist Mercer says the figure was 91% at the end of October. Funding levels are up from 77% at the end of last year, according to J.P. Morgan—a figure that was essentially unchanged since the financial crisis of 2008.

The news for pension plans could get better in 2014. If yields on bonds continue to rise, as many expect when the Federal Reserve eventually reduces its bond buying, the health of corporate pensions could be further bolstered. Funding levels are partly determined by interest rates on corporate bonds, which are used to value future retirement obligations. (…)

Pension-funding details are disclosed at the end of each fiscal year, so most companies will share data in February, when many annual report are released. But analysts says both large and small companies likely will be helped this year.  (…)

About 25% of corporate pensions now are overfunded, or have more investments than future obligations, J.P. Morgan estimates. (…)

SENTIMENT WATCH

Gift with a bow Waiting for That Santa Claus Rally

Say what you will about the stock market’s recent skid, investors have a very favorable tailwind at their backs heading into the final few weeks of the year.

(…) For now, the selloff isn’t causing much concern among market watchers. “This is more of a lack of buyers than any type of real panic,” Mark Newton, chief technical analyst at Greywolf Execution Partners, wrote to clients Wednesday afternoon.

Looking beyond the day-to-day gyrations, here are five trends, courtesy of WSJ Markets Data Group, that point to the December effect on stocks and the rally reaccelerating by the end of the year:

December Is the Best Month for Stocks: The Dow has risen in December 72% of the time throughout its history. It averages a 1.4% monthly gain, the best increase of all 12 months.

Don’t Fret About the Early December Weakness: The bulk of the December rally typically occurs in the final 10 trading days of a year, a trend that bodes well considering the Dow is down 1.5% this month. Historically the Dow is flat, on average, in the first two weeks of December. It then averages a 1.5% gain in the final 10 trading days of the month.

Yearly Highs Happen Most Often in December: There have been 36 times the Dow has hit its high of the year in December, more than twice the amount of the next highest month — January – which has had 16 highs in a given year.

Last-Day-of-the-Year Effect: The Dow has ended at a high on the final trading day of the year 11 times throughout its history. Ten of those 11 instances were record closes, with the most recent occurrence coming in 2003.

Santa Claus Is Good for Stocks: The Dow has risen in the five days before Christmas 65% of the time, including 10 of the past 12 years, averaging a 0.5% gain. The last five days of the year are typically even better for stocks: The Dow has risen 79% throughout this timeframe, averaging a 1.2% gain.

High five  World’s biggest investor BlackRock says US rally nearing exhaustion BlackRock has advised clients to be ready to pull out of global stock markets at any sign of serious trouble

(…) The group said in its 2014 Investment Outlook that investors have “jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow”, but vanishing liquidity could leave them trapped if the mood changes. “Beware of traffic jams: easy to get into, hard to get out of,” it said.

BlackRock, which manages funds worth $4.1 trillion, said the global system is still in the doldrums and far from achieving sustainable recovery. “The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The maths does not work. Not everybody’s currency can fall at once,” it said.

The report said Wall Street is not in a bubble yet but BlackRock’s risk indicator – measuring “enterprise value” against earnings, adjusted for volatility – is almost as high as it was just before the dotcom bust. “The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis,” it said. (…)

 

 

BlackRock said there is a 20pc risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.

“The banking system in the eurozone periphery is under water, with a non-performing loan pile of €1.5 trillion to €2 trillion. Germany and other core countries are unlikely to pick up the tab. Eastern Europe could become the epicentre of funding risk in 2014 due to big refinancings,” it said. BlackRock said the eurozone is “stuck in a monetary corset”, failing to generate the nominal GDP growth of 3pc to 5pc needed for economies to outgrow their debt burdens. (…)

The risk in the US is that Fed tapering could cause the housing recovery to stall. The Fed has purchased three times all net issuance of US mortgages so far in 2013.

BlackRock said the profit share of GDP has soared to a modern-era high of 12pc of GDP, while the workers’ share has collapsed from 66pc to 57pc in one decade. “This speaks to troubling trends of growing inequality and weak wage growth, and brings into question the sustainability of profit margins.

Emerging markets are no longer accumulating foreign reserves at the same torrid pace. The annual growth rate of reserves has dropped to 7pc from 40pc five years ago, which implies far less money flooding into global bond markets. “This is bad news for struggling advanced economies and financial markets addicted to monetary stimulus,” it said.

There is a 25pc chance that the world navigates these reefs and achieves a “growth break-out”. Even if that happens it will not help stocks, and will be “bad for bonds”. The Goldilocks outcome for markets is another year of feeble growth, buttressed by central bank largesse that leaks into asset bubbles. What is good for investors is corrosive for societies, hardly tenable equilibrium.

 

NEW$ & VIEW$ (11 DECEMBER 2013)

Pointing up Pointing up Pointing up The Fed Plan to Revive High-Powered Money

By Alan Blinder
Don’t only drop the interest paid rate paid on banks’ excess reserves, charge them.

Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of “excess reserves” buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that “most” members of its policy committee think a change “could be worth considering,” that’s almost like saying they love the idea. That’s news because they haven’t loved it before. (…)

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue. (…)

At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money.

If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want. (…)

Deal Brings Stability to U.S. Budget

House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), who struck the deal after weeks of private talks, said it would allow more spending for domestic and defense programs in the near term, while adopting deficit-reduction measures over a decade to offset the costs.

Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term jobless benefits, sought by Democrats, wasn’t included.

The plan is modest in scope, compared with past budget deals and to once-grand ambitions in Congress to craft a “grand bargain” to restructure the tax code and federal entitlement programs. But in a year and an institution characterized by gridlock and partisanship, lawmakers were relieved they could reach even a minimal agreement. (…)

The Murray-Ryan deal will likely need considerable Democratic support to pass the GOP-controlled House. Many Republicans, as well as a large number of conservative activists off Capitol Hill, argue that the sequester cuts have brought fiscal austerity to the federal budget and that they should not be eased. (…)

The depth of conservative opposition will become apparent as lawmakers absorb the details, which were released to the public Tuesday night. To draw support from the GOP’s fiscal conservatives, the deal includes additional deficit-reduction measures: While the agreement calls for a $63 billion increase in spending in 2014 and 2015, it is coupled with $85 billion in deficit reductions over the next 10 years, for a net deficit reduction of $22.5 billion.

The deal achieves some of those savings by extending an element of the 2011 budget law that was due to expire in 2021. The sequester currently cuts 2% from Medicare payments to health-care providers from 2013 through 2021. The new deal extends those cuts to 2022 and 2023. (…)

A Least Bad Budget Deal

The best that can be said about the House-Senate budget deal announced late Tuesday is that it includes no tax increases, no new incentives for not working, and some modest entitlement reforms. Oh, and it will avoid another shutdown fiasco, assuming enough Republicans refuse to attempt suicide a second time.

The worst part of the two-year deal is that it breaks the 2011 Budget Control Act’s discretionary spending caps for fiscal years 2014 and 2015. The deal breaks the caps by some $63 billion over the two years and then re-establishes the caps starting in 2016 where they are in current law at $1.016 trillion. Half of the increase will go to defense and half to the domestic accounts prized by Democrats. (…)

The deal means overall federal spending will not decline in 2014 as it has the last two years. (…)

All of this doesn’t begin to match the magnitude of America’s fiscal challenges, but it is probably the best that the GOP could get considering Washington’s current array of political forces. (…)

Four Signs the Job Market Is Getting Better 

Layoffs keep on falling: 1.5 million Americans were laid off or fired in October, the fewest since the government began keeping track in 2001. The October drop was unusually large and may be a fluke, but the trend is clear: Layoffs are back at or below prerecession levels.

Quits are rising: (…)  2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than a year earlier. Quits are still below normal levels, but they’re finally showing a clear upward trend.

And openings too: Employers posted 3.9 million job openings in October, also a postrecession high. (…) There were 2.9 unemployed workers for every job opening in October, the third straight month under 3 and down from a more than 6:1 ratio during the recession.

Hiring is finally rebounding: (…) Hiring has topped 4.5 million for three straight months for the first time in the recovery, and has been up year-over-year for four consecutive months.(…)

But don’t get too excited: (…)The three-to-one ratio of jobseekers to openings is nearly double its prerecession level, and would be higher if so many unemployed workers hadn’t abandoned their job searches. Companies remain reluctant to hire, and many of the jobs that are getting created are in low-wage sectors — nearly a third of October’s hiring came in the low-paying hospitality and retail sectors. The epidemic of long-term unemployment has shown little sign of easing. Despite signs of healing, in other words, a healthy job market remains a long way off.

Wells Fargo Chief Sees Healing Economy

Wells Fargo& Co. Chief Executive John Stumpf said Tuesday the economy is healing, five years after the bank purchased Wachovia Corp. in the midst of a global financial meltdown.

He said government progress on a budget deal, lower unemployment and signs businesses are looking to expand give him reason to be optimistic. “As I’m talking with our customers, especially our small business and middle-market customers, I’m starting to hear a little more about expanding businesses,” he said.

Now, go back to Alan Blinder’s op-ed above.

European carmakers: speeding up

(…) Consultants at LMC Automotive reckon that November saw a 0.7 per cent rise year on year. That follows increases of over 4 per cent and almost 5.5 per cent in October and September respectively – so, at long last, a sustained upward trend for Europe’s crisis-hit sector. 

High five In three of the big markets – Germany, France and Italy – the November sales pace was lacklustre at best and down by over 4 per cent at worst. Spain, which saw a strong advance, benefited from a very easy year-on-year comparison and scrappage incentives. Pricing, too, remains weak across the sector. Last week, Fiat detailed transaction (as opposed to listed) price trends, in segments ranging from economy to basic luxury models for both the German and Italian markets. As of September, these were barely above 2007 levels and, after allowing for inflation in the intervening period, well down in real terms.

Above all, given the small number of plant closures since 2008, Europe still has massive overcapacity on the production side. If 2013 ends with under 12m cars sold in western Europe and 4.5m in eastern Europe, the total will be down by a fifth on 2007 levels. Europe’s light vehicle production, meanwhile, will probably top 19m units – just two-thirds of estimated plant capacity. Sales rises of 2-3 per cent, say, in 2014 will make only modest inroads on that gap so pricing pressures may persist.

China New Yuan Loans Higher Than Expected

Chinese financial institutions issued 624.6 billion yuan ($103 billion) worth of new yuan loans in November, up from 506.1 billion yuan in October and above economists’ expectations.

Total social financing, a broader measurement of credit in the economy, came to 1.23 trillion yuan in November, up from 856.4 billion yuan in October.

China’s broadest measure of money supply, M2, was up 14.2% at the end of November compared with a year earlier, slightly lower than the 14.3% rise at the end of October, data from the People’s Bank of China showed Wednesday.

IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery

The IEA estimated today in its monthly oil market report that demand will increase by 1.2 million barrels a day, or 1.3 percent, to 92.4 million a day next year, raising its projection from last month by 240,000 a day. U.S. fuel use rose above 20 million barrels a day in November for the first time since 2008, according to preliminary data. While the agency boosted its forecast for the crude volume OPEC will need to supply, “making room” for the potential return of Iranian exports “could be a challenge for other producers” in the group, it said.

“The geopoliticals are now bearish, while the fundamentals are bullish,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said before the IEA published its report. “This is quite a change from just recently. People are anticipating tighter supplies as we go into next year. Demand will be higher.”

The agency raised estimates for supplies required next year from the Organization of Petroleum Exporting Countries by about 200,000 barrels a day, to 29.3 million a day. That’s still about 400,000 a day less than the group’s 12 members pumped in November, according to the report.

OPEC’s output fell for a fourth month, by 160,000 barrels a day, to 29.7 million a day in November, as a result of disruptions in Libya and smaller declines in Nigeria, Kuwait, the United Arab Emirates and Venezuela. The group decided to maintain its production target of 30 million barrels a day when it met on Dec. 4 in Vienna.

Saudi Arabia, the organization’s biggest member and de facto leader, kept production unchanged last month at 9.75 million barrels a day, the report showed.

This chart via FT Alphaville reveals how OPEC is effectively managing supply.

SENTIMENT WATCH

Can We Finally All Agree That This Is Not a Bubble?  All the bubble chatter over the past few months is increasingly looking like just a bunch of hot air.

A look at the IPO and M&A markets also point to caution rather than exuberance. “A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses,” said Jeffrey Kleintop, chief market strategist at Boston-based brokerage firm LPL Financial. While M&A activity is trending higher, it remains far below the peak 2007 levels, and 2000 for that matter, he pointed out.

RBC Capital has the chart:

image

 

Media bubble?

It seems to me that most media have been giving a positive spin to the not so great economic news of the past few months. This RBC Capital chart carries no emotion:

image

 

High Yield Spreads Hit a Six Year Low

(…) At a current reading of 411 basis points (bps) over treasuries, spreads are at their lowest level in more than six years (October 2007)!

With high yield spreads at their lowest levels since October 2007, skeptics will argue that the last time spreads were at these levels marked the peak of the bull market.  There’s no denying that, but we would note that in October 2007, spreads had already been at comparably low levels for more than three and a half years before the bear market started.  Additionally, back in the late 1990s we also saw a prolonged period where spreads were at comparably low levels before the market began to falter.

Another reason why the low level of spreads is of little concern is because default rates are also at historically low levels.  According to Moody’s, the default rate for junk rated American companies dropped to 2.4% in November, which according to Barron’s, “is barely more than half its long-term historic average and down from 3.1% a year ago.”

Not really bubbly, but getting closer…

Here’s an interesting chart:

Performance of Stocks vs Bonds

(…)  With the S&P 500 up 23.4% and long-term US Treasuries down 10.2% over the last 200-trading days, the current performance spread between the two asset classes is above 30 percentage points.  (…)

While it is common for equities to outperform treasuries, the current level of outperformance is relatively uncommon.  In the chart below, anything above the green line indicates a performance spread of more than 30 percentage points.  As you can see, the only other periods where we saw the spread exceed 30 were in 1999, 2003, 2009, and 2011.

What makes the current period somewhat different, though, is the period of time that the spread has been at elevated levels.  With the spread first exceeding 30 percentage points back in March, we are now going on nine months that the spread has been at elevated levels.  At some point you would expect the two to revert back to their long-term historical average.

Hedge funds attract billions in new money
Investor inflows jump sharply even as performance lags stocks

Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7 per cent on their assets under management at the end of 2012, according to figures from the data provider Preqin.(…)

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.”

With the same humongous fees…

Yesterday, I posted on this:

 

Fatter Wallets May Rev Up Recovery

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, according to the Fed.

Which deserves two more dots to explain the feeble transmission pattern of the past several years:

The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

Click to View

  • And these charts from RBC Capital:

imageimage

image

 

NEW$ & VIEW$ (25 NOVEMBER 2013)

Iran nuclear deal pushes oil prices lower Geopolitical tensions expected to ease and supply rise

Brent crude fell $2.29 to $108.76 a barrel and US-traded WTI was down $1.44 to $93.40 in response to the agreement between Iran and six world powers reached at the weekend to curb Tehran’s nuclear programme in return for the easing of sanctions.

However, some analysts warned that Iranian exports are unlikely to jump in the short term because key limitations on sales – including a ban on exports to the EU – will remain in place until a comprehensive deal is reached.

US-led sanctions have reduced Iranian exports from almost 2.5m barrels a day to just 1mb/d over recent years, squeezing crude supplies, while the prospect of an Israeli or US strike on Iran’s nuclear facilities has added a further risk premium to the market. (…)

Within the oil market the focus is growing on a sentence in a copy of the interim agreement posted on an Iranian news website, which says western powers will suspend sanctions on insurance and transportation services.

Fereidun Fesharaki, head of the FACTS Global Energy consultancy, said a relaxation of shipping and insurance sanctions could lead to an increase of between 200,000 and 400,000 b/d in Iranian export immediately. (…)

image

 

 

Continued Signs of Healing in Labor Market

The job market isn’t healing quickly. But it is healing.

(…) Employers are still hiring close to a million fewer people every month than before the recession, and the pace of hiring has edged up only slowly in recent years. Millions of Americans are still looking for jobs, and millions more have given up looking. (…)

But there are signs that both workers and companies are becoming more confident about the state of the economy. The 3.9 million jobs posted in September is the most since the recession ended nearly four and a half years ago. Perhaps even more significantly, 2.3 million people quit their jobs voluntarily in September, 18.5% more than a year ago. Janet Yellen, President Barack Obama’s nominee to lead the Federal Reserve, has highlighted the rate of voluntary exits as a key measure of confidence — one that until recently had been lagging other measures of economic health.

Things are also looking up for the nation’s 11.3 million job seekers. There were 2.9 unemployed workers for every job opening in September, the best mark of the recovery and the second month in a row where the ratio fell under three to one; in the worst of the jobs crisis, there were nearly seven job seekers for every opening.

HOUSING WATCH

 

Weak October Sales Have Home Builders Fretting About Spring

A monthly survey of builders across the U.S. by John Burns Real Estate Consulting, a housing research and advisory firm, has found that respondents’ sales of new homes declined by 8% in October from the September level and by 6% from a year earlier.

Last month’s result marked the second consecutive month in which the survey yielded a year-over-year decline in sales volumes, the first dips since early 2011.

In addition, the percentage of builders disclosing that they raised prices continued to decline, registering 28% in October in comparison to 32% in September and 64% in July. Of respondents, 12% lowered prices in October, in comparison to 12% in September and none in July. (…)

The Burns survey found that sales volumes increased by 31% in the Northwestern U.S. in October from September. Other regions that notched gains included the Southeast, up 13%; Northern California, up 11%; and the Midwest, up 1%. Decliners included Texas, down 21%; the Southwest, down 16%; Florida, down 15%; the Northeast, down 12%; and Southern California, down 8%.

Hottest Housing Markets Hit Headwinds

Some of the nation’s hottest housing markets over the past year are cooling off as buyers balk at paying higher prices while faced with rising mortgage rates, according to a Wall Street Journal survey of market conditions.

In a number of cities across California, Arizona and Nevada—where price gains have been especially strong in the past year—sales are slowing and supply is rising.

Real-estate agents and economists attribute the current slowdown to rising prices and a jump in mortgage rates, which have made homes less affordable for prospective buyers and a less compelling deal for the investors that have played significant roles buying up cheap foreclosures and other distressed homes over the past two years.

For the 12-month period ending in September, values have climbed by more than 33% in Las Vegas and Sacramento, Calif., and by more than 20% in San Francisco, Phoenix, San Diego, and Orange County, Calif., according to Zillow Inc., the real-estate website.

But lately, those gains have moderated. For the July-to-September quarter, home values in Orange County rose just 1%; in San Diego, 2%; and in San Francisco, 3%. Those were the smallest increases in those markets since prices began to rise in early 2012.

(…) In Southern California, Mr. Wheaton said, “we’re seeing more price reductions than we are price increases.” (…)

Inventories are falling in Texas, the Midwest and the Northeast. Compared with a year ago, listings were down in around half of all markets, with big declines in Denver, where inventories were 26% below year-earlier levels, and Manhattan, where inventories fell by 22%.

Listings were down by 19% in Houston; 18% in Dallas; 14% in New York’s Long Island; and 13% in the northern New Jersey suburbs.

Broadly speaking, however, of the 28 major metro areas tracked in the latest Journal survey, nearly half saw inventories rise on an annual basis in September. That represents the highest share of markets showing a rise in supply in nearly three years, with notable increases in San Francisco, Phoenix, Las Vegas, Atlanta and Sacramento. (…)

As demonstrated in my June 2013 post U.S. Housing A House Of Cards?, real estate is a local business. National stats have little meaning for the actual supply demand equation in Houston, in Sacramento or Boca Raton.

France: The people see red

The scarlet hat has become the symbol of protest against François Hollande’s tax rises

In 1675 a popular revolt exploded in Brittany, the rugged north western region of France that juts into the Atlantic Ocean. It was against taxes imposed by Louis XIV, the Sun King, to finance war against the Dutch. The red-capped protesters were known as Les Bonnets Rouges. Nearly 440 years after the uprising was bloodily suppressed, people in Brittany have donned theirbonnets rouges once more. This time they are fighting a wave of taxes imposed not by a king, but by President François Hollande and his socialist government.

“It is another guerre de Hollande,” exclaims Thierry Merret, a bluff Breton vegetable grower, farming union chief and a leader of the new bonnets rouges.

Their challenge has added to a tide of discontent engulfing Mr Hollande. An Ifop poll this month showed his approval rating slumping to 20 per cent, a low no previous president has plumbed in the poll’s 55-year history.

The bonnet rouge has become a symbol of protest not just against taxes, but also the perceived inability of Mr Hollande to deal with a stuttering economy that has seen unemployment climb to nearly 11 per cent of the workforce. (…)

“The situation is unprecedented,” says Laurent Bouvet, professor of politics at Versailles-Saint-Quentin university. “A year and a half after the election, the left is in a potentially catastrophic situation. There is no capacity for movement on the economy or other questions.”

It is not just the business community that is expressing frustration. The bonnets rouges have brought together farmers, fishermen, traders, shopkeepers and workers.

Note Red: the blood of angry men!
     Black: the dark of ages past!
    Red: a world about to dawn!
                Black: the night that ends at last! Note
 
THERE’S ALSO ITALY:

In September, the seasonally adjusted retail trade index decreased by 0.3 per cent compared with August, with food goods falling 0.2 per cent and non-food goods 0.3 per cent. Year on year, retail sales were down an unadjusted 2.8 per cent. The monthly decline was the steepest for eight months, and on an annual basis it was also the biggest in three months.

In the third quarter, retail sales fell 1.2 per cent compared with the same period last year. The data are not adjusted for consumer price inflation, which stood at 0.9 per cent in September, based on the main index, suggesting that retail sales posted a much worse annual contraction in inflation-adjusted terms.

SENTIMENT WATCH

 

S&P Climbs Past 1800

The run to records continued Friday for stocks, with the S&P 500 closing above 1800 for the first time.

S&P Closes Above 1800, Posts 7th Consecutive Weekly Increase: Longest Streak Since 2007

The S&P 500 has now managed the longest weekly winning streak (7 weeks) since May 2007 (when it managed a 9% gain). Off the recent lows, the current run is an impressive 9.6% (for the S&P) (…).

Embarrassed smile Hugh Hendry Capitulates: “Can’t Look At Himself In The Mirror” As He Throws In The Towel, Turns Bullish

First David Rosenberg, then Jeremy Grantham, and now Hugh Hendry: one after another the bears are throwing in the towel. (…)

“I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out,” Hendry said.

“I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time.”

“I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.”

(…) Finally, Hendry’s “come to Bernanke” moment does not come easily:

The manager acknowledged his changing stance may be viewed by some investors as a ‘top of the market’ signal, but said he is not concerned by the prospect of a crash.

“I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell’. The S&P 500 is up 30% over the past year: I wish I had thought this last year.”

Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending.”

BUBBLE WATCH

The Four Horsemen of the Apocalypse are Pulling in the Same Direction. They are a Harbinger for More Stock Market Returns (Hubert Marleau, Palos Management)

Barring financial crises, stock market bull runs need the continuous blessing of four macro drivers. These are: Positive Economic Growth, Sustainable Price Stability, Reasonable Valuation and Accommodative Monetary Policy.

While I recognize that the US stock market is up 150% since the lows of March 2009 without any serious corrections, stock prices could go up more for investors are still selectively and mildly exuberant. A rotation towards equity has just started and it could last for several years.

Since the first quarter of 2009, investors have de-risked their portfolios by adding $1.3 trillion in bonds and selling $255 billion worth of equities. Lately, investors are now allocating somewhere around 20% of their new monies to the stock market. Before the financial crisis as much as 30% to 40% of investors’ capital found its way into stocks. Household balance sheets are much healthier, banks are profitable and settling their wrongdoings, and corporations are loaded with cash. In this context, even if the economy may not be doing as well as one would like a financial crisis is not looming.

Moreover, the four horsemen that choose the direction of the stock market are still bullish.

1) Positive Economic Growth: The level of economic output in the US has been steadily growing without any interruptions for 51 months since it bottomed during the second quarter of 2009. During the period under review, the US economy grew at the annual rate of change of 2.0%. In the past six months, the pace of the economy has accelerated to 2.7%.

2) Price Stability: A steady annual rate of increase in the general price levels between 1% and 3% is considered by the Fed and most seasoned market observers as price stability. Since the third quarter of 2009, the GDP Chain Price Index increased at the annual rate of 1.4%. For the period under review, the lowest quarterly annual rate was 0.6% in the second quarter of 2013 and the highest was 2.6% in the second quarter of 2011. During the third quarter of 2013, GDP Deflator printed a year over year increase of 1.3%. Based on recent developments in commodity prices, wages and output per hour, there is reason to believe that price inflation is going to remain stable for a prolonged period of time. Moreover, the gap between actual and potential output is sufficiently wide to prevent any upward cost pressure.

3) Accommodative Monetary Policy: The rate on Federal Funds has been near zero throughout the period under review. The Zero Rate Policy had three beneficial effects. It kept the level of real interest rate negative, the yield curve positive and the cost of capital below the return on capital. The latter is often called the “Wicksellian Differential”.

While we expect the Fed to start paring down the $85 billion-a-month bond purchase program in the coming months, the monetary authorities will continue to hold short term rates near zero until a higher participation rate and/or a lower unemployment rate firmly takes hold. The Palos Monetary policy index currently stands at 60 indicating that the interest rate stance of the Fed is not about to change. In this connection, the beneficial effect of ZIRP (zero interest rate policy) on real rates, yield curve and the Wicksellian spread is maintainable.

4) Reasonable Equity Valuation: The stock market is not necessarily cheap, but it’s not stretched by historical standards. Currently, the median 12-month forward price-to-earnings ratio of 16.0 times is consistent with other periods of earnings growth. Moreover, the spread between corporate bond yields and stock dividend yields at 250 bps are as narrow as they were in the 1950’s. One should also bear in mind that the EPS of the S&P-500 increased 125% from the first quarter of 2009 to the third quarter of 2013 closely matching stock market returns. Year over year, the same EPS is up 9.3% and forecast to increase another 5.1% in 2014.

In conclusion, what is not to like? In tandem, the major drivers are pulling the stock market up. It is not that stock prices will surge ahead over the next few years in a perpetual upward motion. However, stock market returns should continue to beat bond market returns.

Hubert is a good friend of mine, an excellent economist and a good strategist. I am not sure how investors can be “selectively and mildly exuberant” but I know Hubert can’t be only mildly exuberant.

The first chart below plots the S&P 500 Index PE on forward EPS, currently at 15.4x, 28% above its 60-year median of 12x and at the mid-point of the 1 standard deviation channel (10-20x).

image

 

One can make a case for decent valuations here, even more so if the 60-year average of 15x is used instead of the median. Do it at your own risk, however, if you chose to ignore the statistical impact of recent bubble years. As to Hubert’s assertion that “the median 12-month forward price-to-earnings ratio of 16.0 times is consistent with other periods of earnings growth”, it does not verify in the 1991-92 period (profits troughed in mid-1992).

During the 1955-1972 period of prolonged high P/E multiples, earnings remained flat until 1962 before rising steadily through 1966. Inflation was quite volatile between 1955 and 1960, fluctuated narrowly within 1-2% up to 1966, then skyrocketed from 2% to 6.5% by 1970 before coming back to the 3% range by 1972.

image

 

image

 

The 1961 to 1966 period most closely resembles the current environment of expected sustained low inflation. Earnings rose strongly and steadily until inflation peaked in late 1966. Equities dropped sharply in 1962 (Bay of Pigs crisis) but skyrocketed during the next 4 years. Throughout that period, forward P/Es fluctuated between 15x and 17x, partly validating Hubert’s comments.

Nevertheless, with forward P/Es, one must deal with the pitfalls associated with earnings forecasts. But even with trailing earnings, absolute valuations never looked really compelling during the 1960s except in late 1966 and in mid-1970 when trailing P/Es reverted back to their 60-year median value of 13.7. Waiting for even median valuation would have meant missing the near doubling in equities between October 1960 and December 1965.

image

 

So Hubert has a point. But I have a better and stronger one. The Rule of 20 worked really well during the 1960’s while using actual trailing earnings and constantly taking account of inflation fluctuations.

image

Using the Rule of 20, investors would have sold before the 1962 decline of 24%, bought back aggressively late in 1962, remained reasonably invested as the market rose 67% to December 1965 while flirting with “fair value” (20), suffered the 16% setback of 1966 if they were not mindful of rising inflation, bought aggressively again in the fall of 1966 to enjoy a 30% gain until getting entirely out of equities in mid-1968 just before the ending of the Nifty-fifty stocks era.

Freezing  Some Stock Bulls Tread Lightly

Stock-market strategists, typically a bullish bunch, are taking a cautious approach to the S&P 500.

(…) Forecasts center on gains in the mid-to-high single-digit percentages for the S&P 500 in 2014.

In large part this caution reflects expectations that investor enthusiasm for stocks will be restrained in an environment in which structural challenges continue to hold back the U.S. economy. The result, many strategists said, is that stocks are unlikely to see a continued rise in valuations against earnings growth as they did in 2013.

In addition, bullishness is being muted by a belief that the Fed will in coming months start to pare back the easy-money policies that many said have played a key role in driving stock prices higher this year.

But some strategists said it also reflects a conscious effort to present a tempered outlook.