NEW$ & VIEW$ (31 OCTOBER 2013)

Fed Opts to Stay Course For Now

Fed officials emerged from a policy meeting with their easy-money program intact and no clear signal about whether they would begin pulling it back at their December meeting or continue it into 2014.

(…) “The housing sector has slowed somewhat in recent months,” the Fed said in its statement. All in all, however, officials stuck to their view that the economy is expanding “at a moderate pace” and exhibits growing underlying strength.

Inflation Stays Tame, Supporting Fed on Easy-Money Strategy

U.S. consumer prices climbed modestly in September, underscoring weak inflation and supporting the Federal Reserve in keeping its bond-buying program intact.

The consumer-price index, which measures what Americans pay for everything from bread to dental care, rose 0.2% from August, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, increased 0.1%.

From a year ago, overall prices were up 1.2% while core prices were up 1.7%.

Wednesday’s report is particularly noteworthy because it’s used to calculate annual cost-of-living increase in Social Security payments for almost 58 million Americans. The Social Security Administration said Wednesday that benefits would increase 1.5% in January.

Pointing up But underlying inflation trends remain above 2.0%:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in September. The 16% trimmed-mean Consumer Price Index also increased 0.2% (2.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.



Another Downbeat Payrolls Report

ADP private-sector payrolls rose a lackluster 130,000 in October following a downwardly-revised 146,000 increase in September. While firms are still hiring, there’s no denying the slowing trend. Pronounced weakness among small service-providing businesses suggest the 16-day government shutdown was a special factor this month, and that payrolls will rebound in November…unless business owners fear another shutdown in the New Year. (BMO Capital)



Money  Rich People’s Views of the Economy Near Pre-Recession Levels

Affluent U.S. households, buoyed by a surging stock market, feel better about the economy this fall than at any time since before the recession began.

A gauge of sentiment about current economic conditions among the wealthiest 10% of Americans jumped 22 points from the spring to a fall reading of 93, a survey by the American Affluence Research Center showed.

It’s the first “neutral” reading after five years mired in “negative” territory. The last time the index found positive sentiment — above 100 — was the fall of 2007, just before the recession began.

(…) “The stock market has made a big recovery…and these people control over 80% of all stocks and securities owned by the general public.”

Despite the optimism, many wealthier Americans said they’re reluctant to open their wallets further.

Of 17 categories tracked by the biannual survey, respondents only expect spending on domestic vacations to increase during the next 12 months.

The affluent said they plan to decrease spending on designer apparel, fine jewelry and camera equipment. They expect to hold steady in most other categories, including entertainment, dining out and home furnishings.

Ghost The rich even said they’ll cut back on holiday shopping.

The survey found affluent households plan to spend an average of $2,175 on holiday gifts, a 2.8% decline from 2012. (…) Last year, the rich spent 7% more than they said they would in the fall 2012 survey, Mr. Kurtz said.

Goldman Shrinking Pay Shows Wall Street Poised for Bonus Gloom

The firm’s average compensation cost per employee fell 5 percent to $319,755 in the first nine months of 2013. At JPMorgan Chase & Co.’s investment bank, it fell 4.8 percent to $165,774. The figure plummeted 16 percent at Zurich-based Credit Suisse Group AG to $204,000.

At the other extreme:

Retailers Brace for Cut in Food Stamps

Retailers and grocers are bracing for another drain on consumer spending when a temporary boost in food-stamp benefits expires Friday.

The change will leave 48 million Americans with an estimated $16 billion less to spend over the next three years and comes just months after the expiration of a payroll tax cut knocked 2% off consumers’ monthly paychecks.

On the business side of the equation, the cuts will fall particularly hard on the grocers, discounters, dollar stores and gas stations that depend heavily on low-income shoppers. Weak spending in that stressed consumer segment has already led retailers including Wal-Mart Stores Inc. and Target Corp. to lower their sales forecasts for the rest of the year ahead of holidays. (…)

Enrollment in food-stamp benefits surged during the recession and in its wake, increasing by 70% from 2007 to 2011 before leveling off. The government’s stimulus program increased Supplemental Nutrition Assistance Program, or SNAP, benefits across the board by 13.6% in 2009.

As that temporary increase expires on Friday, benefits for a family of four receiving a maximum allotment will drop by 5.4%, the equivalent of about $36 a month, or $420 a year, according to the U.S. Department of Agriculture.

The $16 billion, three-year toll of the cuts estimated by the Center on Budget and Policy Priorities pales in comparison with the estimated $120 billion, one-year hit caused by the earlier expiration of the payroll tax cut. But for many retailers the two have a cumulative effect.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps. That would mean it pulled in $14 billion of the $80 billion the USDA says was appropriated for food stamps in the year ended in September 2012.


Storm cloud  Eurozone retail sales fall at faster rate in October

Eurozone retail PMI® data from Markit showed a steeper drop in sales at the start of the final quarter of 2013. The Markit Eurozone Retail PMI remained below neutrality and declined to 47.7, from 48.6, indicating the fastest monthly rate of decline since May. In contrast, the average reading over the third quarter was the highest since Q2 2011 (49.5).

The faster decline in eurozone retail sales mainly reflected a steeper contraction in Italy, which had seen the slowest fall in sales in two years one month previously. Sales fell further in France, albeit at a slower rate, while the rate of growth in Germany was the weakest since May.



France September consumer spending was down 0.1% on the month, having dropped 0.4% in August and was down 0.1% YoY.



Euro Inflation Slows, as Rate-Cut Pressure Grows

Annual inflation in Germany fell in October to 1.3% from 1.6% the previous month based on common European Union definitions, Germany’s statistics office said. In monthly terms, consumer prices fell 0.2% from September.

Separately, Spain’s statistics institute said annual price growth in the euro zone’s fourth-largest economy fell to 0.1% in October from 0.5% in September.

Belgium also reported low inflation rates this month, with annual consumer price growth of 0.6%, the lowest since January 2010.

Taken together, Wednesday’s reports suggest annual euro-zone inflation, due for release Thursday, will come in as low as 0.9%, economists said. That compares with 1.1% in September and is far below the ECB’s target of just under 2% over the medium term.

The October CPI Flash Estimate rose 0.7% YoY up 1.1% in September.


From Bank of America Merrill Lynch:


US stock market cap to GDP (Exhibit 2), one of Warren Buffet’s favored valuation metrics, is currently 1.12x, clearly high by the standards of the last 60 years. The measure is at the very least a reminder that growth in 2014, rather than liquidity, is essential to prevent an overshoot of the equity market.



U.S. Blasts German Policy

The Treasury’s semiannual report says Germany’s export-led growth is creating problems for the euro zone and the global economy.

Employing unusually sharp language, the U.S. on Wednesday openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy.

In its semiannual currency report, the Treasury Department identified Germany’s export-led growth model as a major factor responsible for the 17-nation currency bloc’s weak recovery. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the “key findings” section of the report. (…)

The focus on Germany represents a stark shift in the Obama administration’s economic engagement with one of its most important allies. (…)

Punch  Jacob Kirkegaard, an expert on the euro zone at the Peterson Institute for International Economics, said the timing of the criticism is likely an attempt to influence economic policy in Germany while a new coalition government is being formed and is debating its agenda for the next several years. (…)

Ninja  The currency report comes at a time when officials in Berlin and Washington are already clashing over other issues including allegations about U.S. spying. (…)



NEW$ & VIEW$ (16 OCTOBER 2013)

Empire Manufacturing Weaker Than Expected

While economists were expecting the headline reading to come in at a level of 7.0, the actual reading was just barely positive at 1.5.  This was the weakest reading seen since May.

New orders were good, though.


MBA: Shutdown impacting Purchase Mortgage Application Activity

Mortgage applications increased 0.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 11, 2013. …

The Refinance Index increased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. …

The government shutdown had a notable impact on the mortgage market last week. Purchase applications for government programs dropped by more than 7 percent over the week to their lowest level since December 2007, and the government share of purchase applications dropped to its lowest level in almost three years,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Conventional purchase applications dropped as well, but not to the same extent, falling almost 4 percent for the week.”


European Car Registrations Recover

New car registrations in the European Union rose 5.4% on year in September, underscoring confidence that demand for new vehicles in the region is on the cusp of a sustained recovery after a more than five-year slump.

New car registrations, a proxy for sales, rose to 1.16 million with strong increases in some crisis-hit southern European countries, according to the European Automobile Manufacturers’ Association, or ACEA. The rise amounts to the first quarterly rise in sales since 2008.

That narrowed the decline this year to 4 percent, for total deliveries of 9.34 million cars.

Last year, EU registrations were almost a quarter below the 2007 level.

(…) Mr. Fuss cautioned, however, that sales “continue to be artificially boosted by huge discounts and self-registrations by dealers.” (…)

In September, registrations in the region were boosted by an almost 29% increase in Spain, helped by a scrapping program and a low figure in the same period last year. Other crisis-hit markets are also rebounding, with Hungary up 32%, Ireland up 28% and Portugal up 16%. (…)

Sales rose 12 percent in the U.K., where consumer confidence was at a six-year high in September, and climbed 3.4 percent in France. Registrations fell 1.2 percent in Germany, Europe’s biggest economy, and 2.9 percent in Italy. (Bloomberg)

Letta Reshapes Italy Austerity With Tax Cut, Spending Curbs

Italian Prime Minister Enrico Letta reshaped the country’s two-year commitment to austerity by approving a labor-tax cut and relying on 3.5 billion euros ($4.7 billion) of spending reductions to meet 2014 deficit targets.

The central government will bear 2.5 billion euros of the cuts and regional administrations will deliver 1 billion euros, Letta told a news conference in Rome after his cabinet approved next year’s budget yesterday. The labor-tax reduction will give an extra 1.5 billion euros to workers next year and a total of 5 billion euros through 2016, he said. Companies will get tax breaks of 5.6 billion euros in that span. (…)

While VAT increased under Letta on Oct. 1 to 22 percent from 21 percent, the premier said yesterday he’s focused on easing fiscal pressure in the long term. Italy’s tax burden will fall to 43.3 percent in 2016 from 44.3 percent, Letta said. (…)

The government said last month it plans to reduce the deficit to 2.5 percent of gross domestic product in 2014 from its target of 3 percent this year. Italy’s 2 trillion-euro debt is about 130 percent of GDP, the second-highest ratio behind Greece in Europe.

“A decrease in labor costs will be positive but this is not the Italian problem,” Romano Prodi, a two-time Italian prime minister, said in an interview. “The problem is bureaucracy, the anti-business behavior of the public administration.” (…)


Scotia Capital’s charts exude prudence…and hope:



Although U.S. corporate profits are still growing, the pace of improvement has slowed meaningfully since mid-2011. From double-digit growth in 2011, U.S. corporate profit growth has slipped to the low single digit range. Based on the latest corporate profit figures released by the Bureau of Economic Analysis (BEA), profit growth expanded 5% YOY in Q2, a modest rebound from the 2% to 3% pace seen in preceding two quarters. The impact has also been felt on the S&P 500 index with YOY EPS growth stalled since Q3/12.

A breakdown of U.S. corporate profits indicates that profits earned abroad have been declining since mid-2011 while profits generated on U.S. soil have continued to expand.

Global PMIs bouncing. The global macro picture has improved in the past couple months. Europe is out of recession and modestly growing, while the latest macro figures out of China are suggesting the economy is stabilizing. As illustrated in Exhibit 12, the upswing in the global PMI index bodes well for a positive reversal in U.S. corporate profits earned abroad in coming quarters.

U.S. earnings have been firing on only one of two cylinders (i.e., domestic earnings) for the past two years, but this could be about to change. Earnings earned abroad account for about 20% of the overall corporate earnings picture and rebound could help overall U.S. earnings growth visibility, especially for U.S. large caps.


Small and mid-cap companies derive a larger part of their profits domestically:

Midcaps, Smallcaps Hit New All-Time Highs

(…) Smallcaps and midcaps, however, did indeed hit new all-time highs today.  As shown in the second and third charts below, three days of huge gains pushed both the S&P Midcap 400 and the Russell 2,000 (smallcaps) above their all-time highs from the first trading day of this month.  Smallcaps and midcaps are both seen as market leaders, so technicians will take this is a bullish sign.

Forward earnings (Ed Yardeni):

Crying face  Your graphical clownshow


NEW$ & VIEW$ (8 OCTOBER 2013)

Small Businesses Skeptical About Future; Optimism Dips

The Optimism Index was basically unchanged, giving up two-tenths of a
point, statistical noise. The only interesting change in the components was
an 8 point deterioration in expectations for business conditions over the
next six months.





U.S. Consumers Falling Behind on Bills after Years of Improvement

Consumer delinquency rates rose for the first time in two years in the second quarter, possibly showing that the broad household deleveraging seen since the recession concluded in 2009 may be coming to an end.

The American Bankers Association’s composite delinquency ratio, which tracks eight types of debt including auto and home-equity loans, increased to 1.76% in the second quarter from 1.70% the prior period. Similarly, the delinquency rate on credit cards issued by banks inched up 0.1 percentage point to 2.42%. (…)

Consumer delinquency rates peaked near the end of the recession when many Americans were out of work. The composite index reached 3.35% in the second quarter of 2009. (…)

Delinquency rates are now well below historic levels. Bank credit-card delinquency is 37% below its 15-year average, the association said. (…)

A Federal Reserve report Monday showed consumers’ credit-card balances declined for the third consecutive month in August but total debt increased thanks to increased auto lending and student loans. (…)



…EVENTUALLY, because it ain’t helping just yet


The back-to-school season has been weak throughout with chain store sales barely ahead of inflation. Does not bode well for Thanksgiving and Christmas. And now this:

Weekly Drop in U.S. Economic Confidence Largest Since ’08

Gallup Economic Confidence Index -- Weekly Averages, January 2008-October 6, 2013

German Factory Orders Unexpectedly Fall on Weak Recovery

Orders, adjusted for seasonal swings and inflation, dropped 0.3 percent from July, when they fell a revised 1.9 percent, the Economy Ministry said today in an e-mailed statement. Economists forecast an increase of 1.1 percent in August, according to the median of 40 estimates in a Bloomberg News survey. Orders climbed 3.1 percent from a year ago, when adjusted for the number of working days.

Domestic factory orders rose 2.2 percent in August from the previous month, while foreign demand fell 2.1 percent, today’s report showed. Basic-goods orders increased 0.5 percent from July, while demand for consumer goods dropped 0.4 percent. Investment-goods orders decreased 0.7 percent, with domestic demand rising 4.7 percent and orders from the euro area declining 9.2 percent.

German Exports Increased in August on Euro-Area Recovery

Exports, adjusted for working days and seasonal changes, increased 1 percent from July, when they decreased a revised 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 1.1 percent, according to the median of 16 estimates in a Bloomberg News survey. Imports rose 0.4 percent from July.


From Thomson Reuters:

A total of 21 companies have already reported Q3 earnings. Of these, 62% exceeded their consensus analyst earnings estimates. This is slightly below the 63% that beat estimates in a typical full earnings season and the 67% that beat in a typical earnings “preseason”.

Pointing up Historically, when a higher-than-average percentage of companies beat their estimates in the preseason, more companies than average beat their estimates throughout the full earnings season 70% of the time, and vice versa. This suggests that third-quarter earnings results are unlikely to exceed expectations at an abnormally high rate. However, the fact that the preseason beat rate is very close to the average suggests that results will probably not be much worse than average either.

Exhibit 2. S&P 500: Earnings Estimate Beat Rates, Preseason and Final
Source: Thomson Reuters I/B/E/S

36 Years Of Over-Optimistic Earnings Growth

Since 1976, Morgan Stanley shows the average consensus EPS growth rate trajectory among the consensus… doesn’t seem to be so “accurate”…

But it remains assured that this time will be different if we look ahead yet again…

Charts: Morgan Stanley (via ZeroHedge)

Hence the use of trailing earnings.



What Happened The Last 2 Times IPOs Were Outperforming The Market By This Much?

When the momentum chasing public greatly rotates to the IPO-du-jour, it would appear that bad things happen in the market. The last two times Bloomberg’s IPO index doubled the market’s performance (in 2007 and again in 2011) it seems it marked a euphoric top. Of course, based on 1998/99’s IPO performance there is plenty more room to run since this time is different. Nevertheless, the volume of coverage allotted to this IPO or that IPO (and not just Twitter) is awfully reminiscent of the go-go days of yore (and we all know how that ends) – though you’ll never be the bag-holder again right?

100% Interactive Brokers Margin Hike

The massive outperformance of the smallest and most trashy companies over the past year, month, week, day etc… stalled this afternoon. No news; no macro data; no change in the situation in DC. So what was it? We suspect the answer lies in the all-time record levels of margin that we recently discussed holding up the US equity market. Interactive Brokers, it would appear, have seen the light and over the next week or so will be increasing maintenance margin to 100% – effectively squeezing the leveraged momentum chasing muppets out of the market (or at the very least halving their risk-taking abilities).

As we warned previously,

Margin Debt still contrarian bearish

Using closing basis monthly data, peaks in NYSE margin debt preceded peaks in the S&P 500 in 2007 and 2000. The March 2000 peak in NYSE margin debt of $278.5m preceded the August 2000 monthly closing price peak in the S&P 500 at 1517.68. The July 2007 margin debt peak of $381.4m preceded the October 2007 monthly closing price peak of 1549.38 for the S&P 500. Margin debt reached a record high of $384.4m in April and the S&P 500 continued to rally into July, August, and September. This is a similar set up to 2007 and 2000.


Société Générale’s quant team screens equity markets with well-­known value investment filters.

Despite the weakness in the latter part of last month, equity markets enjoyed one of their best Septembers on record. Low quality companies led the market showing strong returns in all regions and with double-­digit returns in the Eurozone and Japan.

Companies with weak balance sheets, as defined using the Merton model, were up 10% on a global basis in September, outperforming the market by 3.5% and outperforming companies with good balance sheets by 5.3%. The performance was wider in the Eurozone and Japan where low quality companies outperformed high quality by 8.9% and 9.9% respectively. Our second quality factor, the Piotroski model, showed similar performance with low quality outperforming as much as 5% in the Eurozone and 18% in Japan!

Nerd smile As a result of the strong market performance, we see a further reduction in the number of names that pass our screens. We can now find only 21 deep value and 25 quality income names, so a total of 46 companies down from 53 last month and 200 names a year ago!




Credit Suisse: “Il Cavaliere’s Final Bow

Is Italy ready for life without Silvio Berlusconi? After dominating Italian politics for the past two decades, even as he faced scandals and corruption allegations that would have sunk most political careers, the former prime minister’s influence appears to be on the wane. His failed attempt to topple Prime Minister Enrico Letta’s government last week, after several key members of his own party threatened to revolt, was a serious blow to the billionaire media mogul’s image as a political force. (…)

So far, the reaction to the latest political upheaval on financial markets has been relatively subdued, suggesting investors have either grown accustomed to Italian political turmoil or that they’re focused on the glimmer of order emerging from the chaos of recent weeks. (…)

Still, the political uncertainty has become an unwanted distraction at a difficult point for Italy, as the country seems to be on the verge of recovery from the longest recession since World War II. Relentless bickering between the left- and right-wing coalition partners have hampered efforts to reverse eight consecutive quarters of economic contraction and tackle the country’s public debt of more than €2 trillion and record-high youth unemployment.

Credit Suisse analysts have said that though the Italian economy will contract about 1.7 percent in 2013, next year could see positive growth of 0.7 percent. That’s nothing to write home about, but after such a long period of negative numbers, it would be a welcome change. The analysts also noted that the government has started to pay €40 billion in long-outstanding bills to its own contractors, which should provide a boost to small and medium-sized businesses. But political uncertainty, they noted, is a definite risk to that relatively rosy forecast. (…)

Gavekal explains Italy’s paradox:

(…) One paradox is that the renewed political instability implies automatic fiscal tightening. If, for instance, new elections were called, the government would be on “automatic pilot”: meaning the multi-year fiscal consolidation program that the previous technocratic government put in place would continue.

This should be set against another interesting paradox. When Mario
Monti was chosen to form a technical government in November 2011,
everyone in Europe cheered the replacement of the buffoon by the
reformer—but rating agencies continued to downgrade Italy by several
notches as the economy slid into recession amid fiscal tightening. Italy’s
political uncertainties have risen dangerously since February’s elections,
but the economy has gotten stronger. Consumer and business confidence
has rebounded, and the latest consensus estimates show Italy should run a current account surplus of 0.7% of GDP this year, and a fiscal deficit of 3-3.5% of GDP.

This is much improved from the current account deficit of 3.5%, and fiscal deficit of 4-4.5% of GDP, when Monti came into power. In other words, Italy’s twin deficits are considerably lower today (below -3% of GDP) than they were in 2011 (almost -8% of GDP). Italy’s average
(or five-year) bond yield stood Friday at 3.25%, well below 6% at the end
of 2011. The main determinants of fiscal stability – growth, interest rates,
the primary surplus, etc – are thus incomparably improved. That is why
neither investors nor even the International Monetary Fund really want to see Italy commit to further belt-tightening.

Pointing up  Still, given the return of political chaos, the risks of a new rating
downgrade cannot be overlooked, as public debt is high (130% of GDP)
and still rising. Standard and Poor’s could downgrade Italy closer to junk
status. But the lesser known Canadian agency DBRS holds a more
important key. Among the four reference agencies used by the ECB in its
refinancing operations, DBRS has the highest rating of A– for Italy. Since
the ECB takes the best rating of the four, this allows Italian banks to pay the same rate as German banks on its collateral. If DBRS downgrades Italy, as it did just after the February elections, then the haircut on a 5-year Italian bond would rise from 1.5% to 9%, with a large impact on Italian banks, and thus on other parts of the euro financial markets.

With such uncertainties, we think that Italy will continue to
underperform on credit markets (vs. Spain in particular), as it has done
since the February elections. A contagion effect is also possible if markets
are too literal in their reading of the euro rhetoric that Berlusconi is likely
going to use in the coming weeks, infuriated as he is about the looming
decadenza vote.

OECD: Low Skills to Hamper Spain, Italy

In the most extensive report on skill levels across a wide range of countries to date, the OECD found that workers in Spain and Italy are the least skilled among 24 developed countries.

(…) Both economies have suffered from a loss of competitiveness over the last decade, resulting in large trade deficits and high levels of borrowing. In order to return to strong growth while generating trade surpluses and paying off their debts, their competitive position will have to improve.

But according to the OECD, Italy ranks bottom, and Spain second-to-last among the 24 countries in literacy skills. Over one in five adults in both countries can’t read as well as a 10-year-old child would be expected to in most education systems. In a ranking of numeracy skills, the positions are reversed, with Spain bottom, and Italy second-to-last. That means one in three adults have only the most basic numeracy skills, a fate shared by their U.S. counterparts. (…)

Italy faces an even greater challenge. Not only does it have fewer highly-skilled workers than most other economies, it also uses them badly—or in the case of many highly-skilled women, not at all. (…)

Young Americans Fare Poorly on Skills

U.S. baby boomers held their own against workers’ skills in other industrial nations but younger people fell behind their peers, according to a study, painting a gloomy picture of the nation’s competitiveness and education system.

The study, conducted by the Organization for Economic Cooperation and Development, tested 166,000 of people ages 16 to 65 and found that Americans ranked 16 out of 23 industrialized countries in literacy and 21 out of 23 in numeracy. Both those tests have been given periodically and while U.S. results have held steady for literacy, they have dropped for numeracy. In a new test of “problem solving in technology rich environments,” the U.S. ranked 17 out of 19. (…)

The results show a marked drop in competitiveness of U.S. workers of younger generations vis a vis their peers. U.S. workers aged 45 to 65 outperformed the international average on the literacy scale against others their age, but workers aged 16 to 34 trail the average of their global counterparts. On the numeracy exam, only the oldest cohort of baby boomers, ages 55 to 65, matched the international average, while everyone younger lagged behind their peers—in some cases by significant margins.

In most cases, younger American employees outperformed their older co-workers—but their skills were weaker compared with those of other young people in OECD countries. By contrast, some countries are improving with each generation. Koreans aged 55 to 65 ranked in the bottom three against their peers in other countries. But Koreans aged 16-24 were second only to the Japanese.

The results show that the U.S. has lost the edge it held over the rest of the industrial world over the course of baby boomers’ work lives, said Joseph Fuller, a senior lecturer at Harvard Business School who studies competitiveness. “We had a lead and we blew it,” he said, adding that the generation of workers who have fallen behind their peers would have a difficult time catching up. (…)

Americans with the most cerebral jobs—those that demanded high levels of literacy, numeracy and problem-solving skills—fared the best against the rest of the world. The potential problem lies in the growing complexity of traditional middle-class jobs in fields like manufacturing and health care. Workers unable to grow into those jobs will lose their positions or be stranded with stagnant wages. The result: an economy that continues to bifurcate. (…)

By contrast, Japanese workers are the most skilled in the 24-nation survey, but don’t fully employ many of those skills, particularly because they are denied the opportunity to use their problem solving abilities in what the OECD calls a “technology environment.” The OECD attributes that to the relative inflexibility of Japan’s jobs markets. It does suggest that if Japan were able to fully use its workers skills, it could generate higher rates of economic growth, having long stagnated.


NEW$ & VIEW$ (3 OCTOBER 2013)

U.S. Showdown Bites Manufacturers Layoffs and Production Disruptions Loom at Firms Tied to U.S. Federal Government Shutdown Hits Military Contractors, Suppliers

The partial shutdown of the federal government is leading to layoffs and production disruptions at defense contractors and some manufacturing companies.

Retailers Weigh Into U.S. Shutdown Debate

The National Retail Federation, an industry trade group, came out with its annual holiday forecast Thursday, predicting sales will grow by a middling 3.9% from the year before to $602.1 billion. Early forecasts are sometimes off the mark, and the industry group warned the results could be worse if Washington doesn’t resolve debates over the budget and raising the debt ceiling.

Holiday sales rose by 3.5% in 2012, falling short of NRF’s initial forecast of 4.1% growth.



 Fingers crossed Price of Gasoline Drops For 30th Straight Day



U.S. planned layoffs fall 20 pct in September: Challenger

Employers announced 40,289 layoffs last month, down from 50,462 in August, according to the report from consultants Challenger, Gray & Christmas, Inc.

High five  Still, the September job cuts were up 19 percent from the same month last year. For 2013 so far, employers have announced 387,384 losses, close to the 386,000 seen in the first nine months of last year.

The healthcare sector saw the biggest layoffs, with plans to cut 8,128 employees as health companies faced lower government payments, up from 3,163 in August.

The financial sector saw the next largest number of planned job cuts, with 6,932 in September compared with 3,096 a month earlier.

 China Services Index Increases in Sign of Sustained Rebound

The non-manufacturing purchasing managers’ index rose to 55.4 in September from 53.9 in August, the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing said today.

The federation said a gauge of new orders jumped, retail spending grew strongly and a logistics industry index rose.

 Italy’s Letta Survives but Battle Looms

Italian Prime Minister Enrico Letta won the fight to keep his government alive Wednesday. But the bigger battle will be to revive a sclerotic economy that is emerging as a major threat to the euro-zone recovery.

After days of political chaos, Mr. Letta won confidence votes in both houses of parliament when conservative leader Silvio Berlusconi at the last minute abandoned his bid to topple the government. But the near-death of the coalition, just five months after its formation, illustrates the challenges of pursuing an ambitious economic overhaul amid a fragmented and quarrelsome political scene. (…)

“The Italian political system is preoccupied with itself, it has no time for the country,” says a senior European policy maker. (…)

But don’t worry, Mario Draghi will do “whatever it takes” whatever mess they make!

The stakes are high. Italy’s sheer size, dysfunctional politics and faltering economy are a bigger headache for Europe’s crisis managers than even Greece, which represents only 2% of the euro-zone economy, compared with Italy’s 16%.

And the country’s €2 trillion ($2.7 trillion) public debt makes it too big for Europe’s bailout funds to rescue, should Italy ever lose access to bond markets. (…)

Italian GDP is now 9% smaller than at its precrisis peak in late 2007—a worse performance than Spain or Portugal, and second only to Greece for lost economic output.


Large chunks of Italy’s manufacturing base—the second-largest in Europe after Germany—are in distress. Many of Italy’s signature industries, such as steel, white-goods manufacturing and textiles, are in deep distress. (…)

Italian labor costs today are 30% higher than in Spain, while productivity is 6% lower. So car companies such as Renault and Ford are moving production to Spain. In Greece, costs have fallen so sharply that Unilever has begun producing a new line of low-cost products there for the Greek market. (…)

Over the last five years, Italy attracted an average of just $12 billion of foreign investment a year, compared with $37 billion for France and $66 billion for the U.K.

Euro-Zone Retail Sales Rise

The European Union’s official statistics agency Thursday said sales volumes rose by 0.7% from July, although they were still 0.3% lower than in August 2012.

The figures for July were also revised higher, with Eurostat now estimating that sales volumes rose by 0.5%, having previously calculated they increased by 0.1%.


High five  The details are not as positive. Core sales volume rose 0.6% MoM in August after dropping 0.1% and 0.8% in the previous two months, leaving core volume down 0.3% between June and August, much weaker than during the March-May period when core sales rose 1.1%. image

To repeat Markit’s Eurozone Retail PMI for September:

Retail PMI® data from Markit showed a renewed decline in eurozone retail sales in September. The Markit Eurozone Retail PMI eased below neutrality to 48.6, having signalled the first increase in sales in nearly two years in August.



Malls Are Recovering From the Downturn

Large enclosed malls are recovering from the downturn faster than strip shopping centers, a sign that malls are being hurt less by online retailing.

The vacancy rate of U.S. malls in the third quarter declined to 8.2% from 8.3% in the second quarter, according to new statistics released by Reis Inc., a real-estate data firm. Mall vacancy was 8.7% in the third quarter of 2012, said Reis, which tracks the top 77 markets in the U.S.

But the improvement hasn’t been as strong with shopping centers—typically open-air retail strips that face parking lots. The average national vacancy rate for neighborhood and community shopping centers held steady in the third quarter at 10.5% from the previous quarter, down from 10.8% in the third quarter of last year.

The national average asking rent at shopping centers was $19.25 per square foot, up just 1.5% from the recession low of $18.97 in 2011. The average asking rent for malls in the largest 77 U.S. markets rose to $39.77 per square foot in the third quarter, up 1.4% from the same quarter last year, according to Reis Inc.

(…) Mall vacancy rates are now falling partly because there has been little to no new mall development since 2006, Mr. Calanog said. (…)

Reis: Office Vacancy Rate declines slightly in Q3 to 16.9%

Reis reported that the office vacancy rate declined to 16.9% in Q3 from 17.0% in Q2.  This is down from 17.2% in Q3 2012, and down from the cycle peak of 17.6%.
From Reis Senior Economist Ryan Severino:

Vacancies declined by 10 basis points during the third quarter to 16.9%. This is a marginal improvement after last quarter when the vacancy rate did not change. However, since the market began to recover in mid‐2011, the vacancy rate has been unable to decline by more than 10 basis points in any given quarter. While this is technically an improvement versus last quarter, it is nonetheless a weak result. On a year‐over‐year basis, the vacancy rate fell by just 30 basis points, in line with last quarter’s year‐over‐year decline.

On new construction:

Occupied stock increased by 6.652 million SF in the third quarter. … On the construction side, this quarter 4.099 million SF were completed, down from last quarter’s mini‐spike of 8.049 million SF. While last quarter’s bump in construction activity appears to be an aberration, construction activity for office has been slowly if inconsistently trending upward. Year‐to‐date, the market has developed 15.161 million SF. This is almost double the 8.820 million SF that were constructed through the third quarter of last year.

On rents:

Asking and effective rents both grew by 0.3% during the third quarter. This marks the third consecutive quarter in a row with slowing asking and effective rent growth. Though in reality, rental growth rates are so low that the quarter‐to‐quarter differences are rather minor and could simply be idiosyncratic. Nonetheless, asking and effective rents have now risen for twelve consecutive quarters. Yet, the simple truth is that with vacancy remaining elevated at 16.9%, it is far too high to be conducive to much rent growth. At that level of vacancy, landlords have little leverage to either increase face level asking rents or to remove concessions from leases. A meaningful acceleration in rent growth will not be possible until vacancy falls to pre‐recessionary levels.


U.S. Rises to No. 1 Energy Producer

The U.S. is overtaking Russia as the world’s largest producer of oil and natural gas, a startling shift that is reshaping markets and eroding the clout of traditional energy-rich nations.

[image]The U.S. produced the equivalent of about 22 million barrels a day of oil, natural gas and related fuels in July, according to figures from the EIA and the International Energy Agency. Neither agency has data for Russia’s gas output this year, but Moscow’s forecast for 2013 oil-and-gas production works out to about 21.8 million barrels a day.

U.S. imports of natural gas and crude oil have fallen 32% and 15%, respectively, in the past five years, narrowing the U.S. trade deficit. (…)

The U.S. last year tapped more natural gas than Russia for the first time since 1982, according to data from the International Energy Agency. Russia produced an average of 10.8 million barrels of oil and related fuel a day in the first half of this year. That was about 900,000 barrels a day more than the U.S.—but down from a gap of three million barrels a day a few years ago, according to the IEA. (…)

Saudi Arabia remains the world’s largest supplier of crude oil and related liquids. As of July, Saudi Arabia was pumping 11.7 million barrels a day, according to the IEA. Russia was second, at 10.8 million barrels, while the U.S. was third, at 10.3 million. (…)

U.S. energy producers also are drilling more efficiently and cutting costs in other ways. Some companies have said that the amount of oil and gas produced by shale wells isn’t dropping as fast as predicted.

Ken Hersh, chief executive of NGP Energy Capital Management LLC, a private-equity fund with $13 billion under management, said the immense amounts of oil and gas uncovered in recent years indicate that the U.S. energy boom could last a long time.

“It is not a supply question anymore,” he said. “It is about demand and the cost of production. Those are the two drivers.” (Chart from Ed Yardeni)


One factor S&P Dow Jones indices uses in their stock classifications is an Earnings and Dividend Quality Ranking measurement. The basis for this measurement is to provide investors with a ranking that S&P evaluates based on a company’s stability of earnings and dividend over time. The highest ranking is A and the lowest is D (a company in reorganization).

With this as background S&P has constructed indices based on these rankings. The S&P 500 High Quality Rankings Index consists of stocks with a ranking of A and better. The S&P 500 Low Quality Rankings Index consists of stocks with a ranking of B or lower. The high quality index has a larger weighting in sectors like consumer staples that tend to hold up better in a more defensive or “risk off” market. As the below table shows, this year, the low quality index has outperformed the high quality index by a wide margin.

This pattern of the “risk on” and more cyclical stocks outperforming has continued in the the second half of September, in spite of a down equity market.

(From The Blog of HORAN Capital Advisors)

(…) One characteristic of lower quality stocks is many of them do not pay a dividend. True to form, through the end of the third quarter, the non dividend paying stocks in the S&P 500 Index are outperforming the payers by a wide margin. The return comparison is detailed in the below table.

Nerd smile  Hmmm…Remember, the cream always ends up at the top.

(…) In recent weeks, both Warren Buffett and Carl Icahn warned stocks aren’t cheap. Others are urging investors to move cautiously.

“The opportunity sets aren’t as robust and the margins of safety are smaller,” said David Perkins, who oversees the $1 billion Weitz Value fund at Weitz Investment Management, an Omaha, Neb., value-oriented fund manager that oversees $5 billion.

Mr. Perkins says the firm’s internal readings on the stocks they follow are at their most expensive levels since 2006. He is holding more cash as a result.


  • It’s right here, sir!




“Character” (Jeffrey Saut, Chief Investment Strategist, Raymond James)

“The true prophet is not he who predicts the future, but he who reads history and reveals the present.”

… Eric Hoffer, American moral and social philosopher

I could almost hear my history teacher espousing Eric Hoffer’s words last week as I was asked by a particularly prescient media type if trust and character would really command a “premium” price/earnings multiple for the stock market? My response was “of course,” and as an example I referred him to a quote from John Pierpont Morgan, who built his family’s fortunes into a colossal financial empire. The referenced verbal exchange took place when an aging J.P. Morgan testified before a House of Representatives’ committee investigating the financial interests of the “House of Morgan.” A tough lawyer named Samuel Untermyer queried him. The conversation went like this:

Untermyer: “Is not commercial credit based primarily upon money or property?”

Morgan: “No sir, the first thing is character.”

Untermyer: “Before money or property?”

Morgan: “Before money or property or anything else. Money cannot buy it … because a man I do not trust could not get money from me on all the bonds in Christendom.”

While Morgan’s language is from an era gone by, the essential insight is as clear today as it was decades ago. I recalled the Morgan/Untermyer exchange as I read Friday’s Wall Street Journal, in particular, “Robbery at J.P Morgan.” The article began, “Government lawyers are backing up the truck again at J.P Morgan Chase (JPM/$52.24/Strong Buy) to extract another haul from the country’s largest bank.” Recall that JPM is one bank that did not need taxpayer assistance during the financial fiasco of 2008, or ever since.

To me that speaks volumes about the character of JPM’s CEO, Jamie Dimon. This lack of government dependence, combined with Mr. Dimon’s remarks about how the Dodd-Frank financial reform act is hurting the economy, is likely what put Mr. Dimon in the government’s crosshairs. This also explains why the government is beating up on JPM again over the “London Whale’s” $6 billion trading loss, even though there were NO public costs.

The irony is that Jamie Dimon is one of the few bank CEOs who avoided the credit excesses. He also, at the pleading of the government, rescued Bear Stearns and Washington Mutual (WaMu). Then-FDIC Chairperson Shelia Bair said, “[The WaMu situation] could have posed significant challenges without a ready buyer. … Some are coming to Washington for help; others are coming to Washington to help.” Now it appears Washington is suing JPM for helping.

I have no doubt about Jamie Dimon’s character. I do, however, doubt the character of some of the folks inside the D.C. Beltway, on both sides of the political equation, who are about to close down the government.


Compare the US health system to those of the other large high-income countries. The US spends 18 per cent of its gross domestic product on health against 12 per cent in the next highest spender, France. The US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada, though many people are left uncovered. US spending per head is almost 100 per cent more than in Canada and 150 per cent more than in the UK. What does the US get in return? Life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher. For males this must be partly due to violent deaths. But it is also true for women. (FT’s Martin Wolf)

Ingram Pinn illustration




Tepid Jobs Report Muddies Fed Plans

The disappointing jobs report released Friday leaves Fed officials without a clear-cut signal of an economy on the mend, creating a dilemma for the central bank as it contemplates pulling back on a bond-buying program.

Employers added a steady, if unspectacular, 169,000 jobs in August, and  unemployment rate fell to 7.3% last month. That’s notable improvement from the 8.1% unemployment rate when Fed officials launched the latest stimulus program late last year, but job growth has been anemic in recent months, below the 200,000-a-month level some officials want to see. (…)


“Steady”? Payrolls growth has averaged 148,000 for the past three months, a notable decline from the 199,000 pace of the previous 5 months and well below the 184,000 average of the past twelve months.

Add the significant revisions (net downward revision for June and July of 74,000 jobs) and you get deep in the mud if your job is first to know where you are before finding the right direction.

Then, in the household survey, the total number of people employed declined by 115,000, but the size of the labour force fell by a much higher 312,000, accounting for the decline in the unemployment rate to 63.2%, which is the lowest rate since August 1978 and before the enormous influx of women in the workforce in the 1980s and 1990s.

Bespoke Investment adds:

While much, if not all, of the increase in the labor force participation rate in the 1970s was attributable to women entering the workforce, the shrinking of the labor force since the peak in early 2000 is due in majority to the exit of men from the work force.  For example, since the labor force participation rate peaked, the participation rate among women has declined by just 2.8 percentage points.  Men, on the other hand, have seen their participation rate decline by twice that at 5.6 percentage points.

Due to the fact that men are exiting the labor force at nearly twice the rate of women, the gap between the participation rate among men and women has been steadily shrinking.  The participation rate among men currently stands at 69.5%, while the rate among women is 57.3%.  With a spread of 12.2 percentage points, the gap between the sexes has never been narrower.

More important is that men employment (+ 947,000 or +1.3%) has seriously lagged women employment (+2,326,000 or +3.5%) since 2012. Given the (15-28% depending on industry) gender pay gap, this has probably contributed to corporate profit margins in the past 18 months.



The only piece of good news came from the household survey, which despite the net job losses showed a second consecutive increase in full time jobs.

High five  But as today’s Hot Charts show, despite those gains in full-time positions the share of part-timers in total employment remains much too high. (…) That in turn is restraining the economy e.g. preventing an improvement in home ownership rates and capping wage growth and hours worked. The annualized growth rate in aggregate hours is tracking just +1% so far in Q3, a deceleration from Q2’s pace, suggesting a likely return to sub-2% GDP growth in Q3 after the spike in the last quarter. (NBF Economy & Strategy)


The WSJ keeps hammering:

Part of the problem is also the growing attraction of not working. These columns have reported on the explosion in both the food-stamp and federal disability rolls since the recession ended. A new Cato Institute study shows that the full plate of welfare benefits—food stamps, housing assistance, Medicaid and so on—now pays more than a $12 an hour job in half the states. This, too, plays a role in the expanding number of people who are leaving the workforce. Reforms in those programs would help, but the real cure is faster economic growth.

Why Is One-Sixth of U.S. on Food Stamps? Food-stamp use grew 2.3% in June from a year earlier, with nearly one-sixth of the U.S. population receiving benefits.

One of the largest social safety net programs in the United States, food stamps – formally known as the Supplemental Nutrition Assistance Program, or SNAP – expanded substantially during and after the recession, with enrollment rising about 70% from 2007 to 2011. At the same time, the government also temporarily increased benefits and allowed users in the hardest-hit areas to receive aid for longer-than-usual periods of time. The average monthly benefit was $133 last year.

Critics clamor against what they see as a disturbing rise in government dependency. But new economic research suggests the program’s expansion isn’t alarming and can, in fact, be explained by business cycles. (…)

The 2009 fiscal stimulus program’s temporary increase in food stamp benefits, which may have also boosted incentives to enroll, is set to expire Nov. 1. Congress is not expected to mitigate the scheduled cuts.

Surprised smile


Fingers crossed A Hire Calling for Companies

Companies remain reluctant to add jobs. They may not be able hold off for too much longer.

image(…) One indication companies may need to step up hiring is that there hasn’t been much firing going on. The four-week moving average of initial jobless claims, at 328,500, has reached its lowest level since October 2007. Companies also had workers clocking more time last month, with private payroll hours rising 0.4%. To add that many hours of work without increasing each worker’s time on the job, private employers would have had to increase payrolls by 464,000 positions, rather than the 152,000 they delivered.

High five  What the WSJ fails to mention is that last month’s increase in weekly hours was tiny and left average hours near the low end of their range of the last 3 years. There is thus no immediate need to boost payroll as the WSJ article suggests.image

Here’s a more solid sign of hope from the August NFIB survey (via John Mauldin):

Job creation plans rose a very large 7 points to a net sixteen percent planning to increase total employment, the best reading since January, 2007 and historically a very strong reading. Not seasonally adjusted, 15 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (down 1 point). If this reading is not a fluke, it signals a substantial resumption of hiring in the coming months. Hopefully, the September survey will validate the August readings and reports of actual hiring will turn positive.



How about a baby taper? One little step at a time…

One option that has gained support among some Fed officials in recent weeks: Reduce monthly bond purchases by a small amount, say by $10 billion, to $75 billion a month, and signal as loudly as possible the next step will depend on more evidence the job market is continuing to improve and inflation is moving back toward 2% from its current low levels.

Obama will copycat, one little tomahawk at a time…

Obama’s Limited Strikes Plan Faces Risks of Escalation

An old military mantra — “the enemy has a vote” — describes the situation President Barack Obama is confronting as he tries to muster support for U.S. military strikes against Syria.

Facing a divided Congress and a war-weary public, Obama has promised that any U.S. action will be “limited and proportionate.” Syrian President Bashar al-Assad and his allies, though, will also help decide how long and how big any American military mission in Syria will be.

Canadian Job Creation Triples Forecasts in August

Employment increased by 59,200 and the jobless rate fell to 7.1 percent from 7.2 percent, Statistics Canada said today in Ottawa. (…)

Part-time employment in Canada rose by 41,800 in August, with full-time jobs rising by 17,400, Statistics Canada said. Service industry employment increased by 40,600 and goods-producing companies hired 18,600.

Canada has added 38,400 full-time jobs so far this year, the second-least in that period since 1995. (…)

Job gains have averaged 12,700 this year, compared with 25,900 in 2012. The world’s 11th largest economy needs to add more than 22,000 jobs a month for the rest of 2013 to avoid suffering the weakest annual gain since 2001, except for the recession years of 2008-2009.

Bank of Mexico Takes the Plunge, Surprises With Rate Cut

(…) The central bank, led by Governor Agustín Carstens, was clear in its reasons for cutting the overnight rate target to 3.75%: the economic downturn in the second quarter was “faster and deeper” than expected, and the slack in the economy is likely to remain for a prolonged period.

The bank acknowledged that economic growth this year will be well below the 2%-3% estimate it gave in August, about a week before the National Statistics Institute released the bad news about second-quarter gross domestic product, which contracted 0.7% from the first quarter and was up just 1.5% from a year earlier.

Credit Suisse economist Alonso Cervera, who alone had predicted a quarter-point reduction in the overnight rate Friday, says it’s significant that the Bank of Mexico didn’t call this a one-off cut, as it had done with the half-point reduction in March. (…)

The central bank was sanguine about inflation, which it said is likely to follow a lower path than the 3.5% it recently predicted for coming months. The bank’s permanent CPI target is 3%.

German Factory Output Drops

[image]Data indicators across the euro zone Friday reinforced remarks made Thursday by European Central Bank President Mario Draghi to the effect that while signs of recovery are indeed apparent, they remain weak and somewhat inconsistent.

Industrial output in Germany fell 1.7% on the month in July, the country’s economics ministry reported Friday. This was well below expectations of a 0.5% dip in a Dow Jones Newswires survey of analysts. The data followed an earlier release from the statistics agency that showed exports dropping on the month and the country’s trade surplus narrowing.


China’s Exports Accelerated in August

China’s economy shows new signs of resilience in August, with key trade data pointing to a sustained strengthening in global demand for goods from the country.

Exports continued to gather steam, rising 7.2% in August from a year earlier, according to data released Sunday by the General Administration of Customs. This was up from a 5.1% rise in July and a contraction of 3.1% in June. Imports rose 7.0% from a year earlier in August, down from 10.9% in July.

Shipments to the U.S. rose 6.1% on-year in August, up from 5.3% in July, which marked an improvement from shrinking sales earlier in the year.

Sales to countries in the Association of Southeast Asian Nations — a 10-nation grouping that includes Indonesia, Malaysia, Thailand and Singapore — rose 30.8%.


Credit Suisse analysts track the quarterly change in China premier’s three favoured economic measures in a forward-looking indicator they call the Li Keqiang Momentum Index (LKMI):

Graph China

(…) all three of the LKMI’s indicators have started to gather steam in the third quarter, which reflects the positive news the economist and his team of analysts have been hearing anecdotally (…).


(…) None of the new supports to growth are robust. But they should at the very least keep things in China from getting much worse. (…)


Mutual-Fund Investors Halt March Into U.S. Stocks

Investors pulled a net $226 million out of U.S. equity mutual funds in the week ended Sept. 4, their first week of outflows since the week ended June 5, according to fund tracker Lipper. That was a reversal from the $1 billion of inflows the previous week. (…)

ETF investors have pulled $23 billion from U.S. stock funds over the past four weeks, after sending cash to U.S. stock ETFs for six weeks in a row. In the latest week, they pulled $4.8 billion from U.S. stock ETFs.

TRAVELLING for the rest of the month. Why not?

image(BMO Capital)


NEW$ & VIEW$ (24 JULY 2013)

Mid-Atlantic Manufacturing Activity Goes Negative

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

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

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

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

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

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

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


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

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

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

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

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

More on the last NAR report:

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

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

Majority of Americans Say U.S. Still in Recession

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

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

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

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



Signs Suggest Beijing May Look at Stimulus

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

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

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

Pointing up Menzie Chinn at Ecobrowser adds this:

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

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

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

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

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

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

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



Smile  German Manufacturing Unexpectedly Expands as Services Accelerate

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

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

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

Storm cloud  Dutch Economy Springs Leak, Faces Stagnation

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

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

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

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


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

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

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

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

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

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


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

Czech Central Bank Chief Signals Preference for Easing

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


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

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

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

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

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


By S&P’s Howard Silverblatt:

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

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

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

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

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

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



Margins Calls Can Be Ruinous In Many Ways

Bearish calls based on mean-reverting profit margins may be missing important points.

I generally avoid using forward earnings in valuing equities. I have therefore not spent much time writing about profit margins and whether or not they are about to mean-revert, one of the main points of the equity bear population.

Also, I tend to avoid forecasting future equity levels, preferring to concentrate on evaluating fair market values and monitoring the risk/reward equation along with economic momentum in order to assess whether equities should be favoured or not.

This blog began in early 2009 and rapidly advocated buying equities on the basis of very attractive valuations based on a detailed analysis of P/E ratios over the previous 80 years (S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years). During the following 4 years, using unbiased economic analysis and the objective Rule of 20 valuation tool, I modulated my general bullishness along with the fluctuations in the risk/reward ratio provided by the Rule of 20’s factual analysis (black line in chart below). Managing risk is what this blog is all about.


In DRIVING BLIND, I recently highlighted the facts that S&P 500 trailing earnings peaked one year ago and that revenue growth has decelerated to +1.3% in Q1’13 with most indicators pointing to more weakness in coming quarters. This suggests that maintaining profit margins will be a real challenge for corporate managers, unlike the past several years when rising revenues combined with sharply decelerating costs boosted margins to all-time highs even though world economies remained pretty sluggish.

(Gavyn Davies in FT)

Wondering what is the downside risk in profits, I recently started to look into profit margins and the reasons for their admittedly elevated level. Among the many straight line forecasters and the several astute and patient mean-reverters, few seem to have done a thorough analysis to support their thesis, other than posting charts like the one above and ridiculing people who say “this time may be different”. I wonder what such people were saying back in 1995. While margins have been pretty volatile lately, the two recent lows never went back near previous lows while new highs were recorded in each of the last 3 cycles. Patience is an essential investment virtue, but there is a limit. As Keynes said, in the long run, we’re all dead.

The relationship with wages is most interesting and obviously revealing of some secular trends. The slow declining long term trend in the share of wages observed since the 1960s clearly accelerated during the last 10 years. The easy explanation is that high unemployment allowed corporate America to squeeze labor as the caption on the chart above suggests.

This may be true of the last 4 years but productivity gains have been accelerating for much longer. The huge advances in technology since 1995 coupled with accelerating globalization have strongly contributed to the more recent productivity gains. Previously, these gains eventually transpired into lower prices, keeping margins pretty constant over time. The fact that profit margins have kept rising since 1995 may have more to do with the changing complexion of the economy than with the evil side of capitalistic corporate America. In fact, Gavyn Davies’ next chart shows that the same phenomenon is observed in all advanced economies.

Raj Yerasi, a money manager, wrote a guest post for Greenbackd to show how rising foreign earnings have helped boost American corporate profit margins. Importantly, he explained how the quirks of the national accounts can distort the reality:

To understand this, it is important to note that current analyses do not directly measure profit margins per se (meaning, profits divided by revenues). Rather, they measure corporate profits as a percentage of GDP, which captures not total revenues but the total value addition of corporations (along with other components). While there are multiple potential data issues in comparing profits to GDP, it nonetheless stands to reason that profits as a percentage of GDP should generally correlate with profit margins.

However, one big source of error is that the most widely known NIPA corporate profits data series, which the analyses referenced above appear to be using, represents profits generated by corporations that are considered US residents. As such, this data series includes profits generated by US companies’ international operations (e.g. Coca-Cola India, Coca-Cola China) and excludes profits generated by foreign companies’ US operations (e.g. Toyota USA). GDP, meanwhile, captures all economic activity within US borders, whether undertaken by US companies or foreign companies, and it excludes any economic activity abroad. It should be clear that one cannot compare these two metrics, since the corporate profits data series introduces profits generated by other economies and excludes profits generated by the US economy.

US companies’ profits from abroad have grown tremendously over the last 10 years, much more so than foreign companies’ profits from US operations:

This skews the calculated profits level upwards and by an increasing amount over time, making profit levels today look exceedingly elevated.

To do the analysis correctly, we need to use data that are more apples-to-apples. Fortunately, the NIPAs do include a data series of corporate profits that simultaneously excludes US companies’ profits from abroad and includes foreign companies´ profits from US operations, called “domestic industries” profits. Comparing these profits to GDP, profit levels still appear elevated but now not as much as when using the prior “national” profits data series:

He then tackles another important factor:

It is also worth noting that effective corporate tax rates are lower today than in the past. Per the NIPA data, tax rates have decreased from about 45 percent in the 80s to 40 percent in the 90s to 30 percent in recent years. Using pre-tax “domestic industries” profits as a percentage of GDP, profit levels today may be closer to 20 percent elevated relative to historical norms. (…)

National accounts are one thing but, in reality, we invest in equity markets. The composition of the S&P 500 Index is different than that of the corporate component of the national accounts. Importantly, the industrial complexion of the Index fluctuates over time. To the extent that certain industries have very different structural operating margins and effective tax rates than other sectors, changes in industry weightings within the index will impact the total.

This chart from the American Petroleum Institute (note the typo, they meant 2012) shows how net margins vary by industry. Pharmaceuticals, tobacco and technology enjoy much fatter margins than most other sectors.


Part of the reason is found in the respective effective tax rates, likely the effect of R&D expensing and foreign earnings:

Bespoke Investment plots historical sector weightings of the S&P 500 Index. The 15% increase in Technology stocks’ share of the Index over the last 20 years, reflective of the huge advances in technology referred to above, no doubt has had an impact on total Index margins. The strong rise in importance enjoyed by Tech and Heath Care companies, combined with the decline in Industrials’ weight, phenomena observed in all advanced economies and supported by normal evolutionary and demographic trends, surely explain much of the secular growth in Index margins.

Another factor for currently elevated margins is historically low interest rates which have substantially reduced financing costs in recent years, boosting margins more so than in previous cycles. Obviously, this will succumb to higher rates later in the cycle.

In brief, arguing that margins are historically high and assuming they will necessarily mean revert appear to be too simplistic analysis, at least until we begin to see a real trend toward tax rates normalization across the world.

I don’t have the resources nor the time to try to thoroughly explain why margins have increased over time. It would be useful if large organisations like GMO and Hussman Funds did and shared thorough research on this non-trivial matter. 

The following charts from CPMS Morningstar plot a proxy for net margins for various market sectors since 1993. Current margins are in effect high and have been rolling over. Note how margins and trends can vary significantly over time. Also, cyclicality varies meaningfully between sectors. Importantly, note the volatility at a high level for the CPMS average during the 1990s.

Forecasting aggregate margins is a perilous activity, especially if done without a good understanding of the root causes for trend changes. Making investment decisions on the basis of such forecasts can be very frustrating.













NEW$ & VIEW$ (6 JUNE 2013)

More Signals of Slumping Manufacturing

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

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

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

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

German Factory Orders Fall; Economy Struggles to Recover

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

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

Higher Mortgage Rates Won’t Kill Housing Recovery

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

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

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

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

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

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

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

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

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

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

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

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

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