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.

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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.

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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.

 
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NEW$ & VIEW$ (10 JANUARY 2014)

China Data Suggest Tepid Pickup in West

Exports in December were up just 4.3% compared with the same month a year earlier, down from a much stronger 12.7% year-over-year rise in November, according to customs data released on Friday. (…)

The poor export growth may in part be due to more than trade flows. China’s State Administration of Foreign Exchange said in December it was tightening supervision of trade financing to stop speculative “hot money” flows from being disguised as trade. That likely dragged down an already weak growth number, Ms. Sun said Friday.

Official data showed a jump in December 2012 that many economists attributed to capital flows misreported as trade.

By contrast, the latest import figures were strong, beating forecasts with an 8.3% year-over-year rise in December, up from 5.3% in November. They were boosted by high raw-material shipments. China brought in 6.33 million barrels a day of crude oil in December, a record, and copper, iron ore and plastic imports were up strongly, too. That could indicate that companies are building up inventories again after running them down earlier in the year, said Shuang Ding, an economist at Citigroup,  but he cautioned that the trend may not last long.

However:

CALIFORNIA BOOMING State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in December 2013. Revenues for the month totaled $10.6 billion, surpassing estimates in the state budget by $2.3 billion, or 27.7 percent.

California ended the 2013 calendar year with a burst of tax receipts as the economic recovery continued to boost jobs, incomes, profits, and spending. Revenues flowing into the State’s General Fund coffers totaled $10.6 billion, beating estimates contained in the 2013-14 Budget Act by a hefty $2.3 billion, or 27.7%.

As we noted in our analysis of November’s revenues which, at first glance, appeared to fall short of projections, approximately $400 million of December’s $2.3 billion of unanticipated revenues were actually generated in the month of November but were not deposited into the General Fund and booked into the State’s official ledger until the first week of December.  We attribute this timing anomaly to “Black Friday” weekend falling at the end of November, which impacted the timing of retail sales collections and when they were recorded in the state ledger.

Even when this anomaly is factored-out, December’s revenue numbers alone are still impressive. Retail sales tax receipts surged past estimates by over $700 million, a jump assisted by an improvement in the job market, last year’s 30% swell in stock prices, and strong rebound in housing-related holiday shopping. The growing popularity of online shopping and the agreement of online retailers to now collect California sales taxes also helped boost results.

Personal income taxes exceeded expectations by a large margin of $987 million in December. Estimated taxes were very high, bolstered by capital gains and the desire by taxpayers to make payments by year-end to add to their 2013 federal income tax deduction. Rounding out California’s three major tax sources, corporate tax receipts were better than expected by $189 million during December.

Low-End Retailers Had a Rough Holiday

Retailers such as Family Dollar and Sears had a rough holiday period as their lower-income customers remain under pressure.

Family Dollar Stores Inc. on Thursday lowered its full-year profit forecast and reversed course on strategy. It pledged to cut prices more deeply to win back shoppers, saying its economically challenged customers are under more pressure than ever.

Meanwhile, Sears Holding Corp. said sales at its Sears and K-Mart chains fell deeply from a year earlier, reflecting weakness in its customer base as well as strategic missteps by executives trying to reshape its business. Sears shares plunged 14% in after hours trading.

The company said sales over roughly the past two months, excluding recently opened or closed stores, fell 7.4%. Sales were dragged down by a 9.2% drop in its domestic Sears stores and a 5.7% decline at Kmart with weakness in traditionally strong areas such as tools and home appliances. (…)

Even retailers that target consumers in the middle market have struggled this holiday. Gap Inc., which had been clocking strong sales gains for much of last year, said Thursday that comparable-store sales increased a scant 1% in November and December. L Brands Inc., owner of Victoria’s Secret and Bath & Body Works, said December same-store sales rose just 2% and lowered its earnings guidance for the fourth quarter. (…)

Thomson Reuters rounds it up:

Excluding the drug stores, the Thomson Reuters Same Store Sales Index registered a 2.4% comp for December, beating its 1.9% final estimate. The 2.4% result is an improvement over November’s 1.2% result. Including the Drug Store sector, SSS growth rises to 3.8%, above its final estimate of 2.7%. The late Thanksgiving this year pushed revenue from CyberMonday and other post-Thanksgiving sales into December, helping to offset some of the reduction in sales from the shortened holiday shopping season.

Every apparel retailer in the index missed its SSS estimate with the exception of Stein Mart, as consumers avoided malls during the holiday shopping season, increasingly preferring to shop online. Retailers responded with discounts and promotions to lure customers, while settling for lower margins in the process.

Pointing up Our Thomson Reuters Quarterly Same Store Sales Index, which consists of 75 retailers, is expected to post 1.7% growth for Q4 (vs. 1.6% in Q4 2012). This is below the 3.0% healthy mark.

Banks Cut as Mortgage Boom Ends

A sharp slowdown in mortgage refinancing is forcing banks to cut jobs, fight harder for a smaller pool of home-purchase loans and employ new tactics to drum up business.

A sharp slowdown in mortgage refinancing is forcing banks to cut jobs, fight harder for a smaller pool of home-purchase loans and employ new tactics to drum up business.

The end of a three-decade period of falling mortgage rates has slammed the brakes on a huge wave of refinancing by U.S. households. The drop-off has deprived lenders of a key source of income at a time when the growth in loans for home purchases remains weak.

The Mortgage Bankers Association next week plans to cut its 2014 forecast for loan originations, which include loans for home purchases and refinancing. The current forecast of $1.2 trillion would represent the lowest level in 14 years. The trade group Wednesday reported that mortgage applications in the two weeks ending Jan. 3 touched a 13-year low. (…)

In the third quarter, mortgage-banking income, which includes fees from making new loans and processing payments on existing loans, tumbled by 45% at 10 big banks tracked by industry publication Inside Mortgage Finance. (…)

Draghi Says ECB Ready to Act

European Central Bank chief Mario Draghi pledged “decisive action” if needed to safeguard the euro-zone recovery, as it kept its key lending rate at a record low 0.25%.

The European Central Bank surprised markets with an emphatic assurance that it would respond aggressively if inflation weakens to dangerously low levels, as officials sought to spur the fragile euro-zone recovery.

President Mario Draghi‘s pledge Thursday to deploy “further decisive action” if needed to counter threats stands in contrast to the Federal Reserve, which deployed its stimulus measures sooner and is now slowly winding them down amid signs of more robust U.S. growth.

France’s industrial output surged by 1.3% in November (-0.5% in October), against expectations for a 0.4% rise. EU’s IP could be turning positive YoY:image

OIL
 
Slower China oil demand to test exporters
Crude imports grew by the least in almost a decade in 2013

(…) Last year imports averaged 5.64m barrels a day, an increase of 216,880 b/d, or just under 4 per cent from 2012, according to customs data released on Friday. That was the lowest annual growth since 2005 and a fraction of the record increase in 2010, when import growth topped 700,000 b/d. (…)

But China’s economic growth is beginning to slow, while the focus on energy-intensive manufacturing is also fading.

China also has moved from being a net importer of diesel – a key industrial fuel – to a regular exporter. As a result the need to build new refineries, which encourage more imports, has also become less urgent. (…)Site Meter

Oil Breaking Down

Oil has now given up all of its December gains since the calendar moved into 2014.  As shown below, another dip today has caused the commodity to “break down” below its lows from last November, leaving it just above the $90 level.

Now, that’s WTI which suffers from the surge in U.S. domestic production. Brent, the key crude for U.S. prices is holding its own:

Ghost SENTIMENT WATCH

Prospect of US bond market showdown rises
Pace of recovery brings forward expectations of tightening

Bond traders are bringing forward their expectations of when the Federal Reserve will start to tighten policy, leading to a jump in short-term US borrowing costs.

Recent economic data have pointed to a gathering American recovery, and could result in a showdown between policy makers and the Treasury market.

Ian McAvity:

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Lance Roberts:

One argument that I hear made consistently is that retail investors are just now beginning to jump into the market. The chart below shows the percentage of stocks, bonds and cash owned by individual investors according to the American Association of Individual Investor’s survey. As you can see, equity ownership and near record low levels of cash suggest that the individual investor is “all in.”

Click to View

(…) professional investors are just plain “giddy” about the market.

Click to View

Of course, with investors fully committed to stocks it is not surprising to see margin debt as a percentage of the S&P 500 at record levels also. It is important to notice that sharp spikes in this ratio have always coincided with market corrections of which some have been much worse than others.

Click to View

We sure need everything (profits, jobs, interest rates, inflation) to be right…Fingers crossed

 
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NEW$ & VIEW$ (26 DECEMBER 2013)

Signs Point to Stronger Economy

A pickup in business investment and robust new-home sales point to an economy on stronger footing as the year winds to a close.

(…) Orders for U.S. durable goods rose 3.5% last month, reversing a decline in October, the Commerce Department said Tuesday. Excluding the volatile transportation category, manufactured-goods orders rose 1.2%, the strongest gain since May.

Meanwhile, Americans continued to purchase new homes at a brisk pace in November, the Commerce Department said in a separate report this week, the latest sign the housing market is regaining traction after a rise in mortgage rates. New-home sales hit a seasonally adjusted annual rate of 464,000 last month, down only 2.1% from October’s upwardly revised annual rate of 474,000. October and November marked the two strongest months of new-home sales since mid-2008.

The pair of reports showed renewed optimism by businesses and prospective homeowners, two of the biggest drivers of the economy, and led Macroeconomic Advisers to raise its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate.

The overall durable-goods increase was driven by business investment, particularly in civilian aircraft orders, which rose nearly 22%. But a broader measure of business spending on software and equipment rose at a solid pace in November after falling in recent months. Orders for nondefense capital goods, excluding aircraft, increased by 4.5%, its strongest pace since January. That could be a sign businesses stepped up spending after the partial government shutdown in October. (Chart and table from Haver Analytics)

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U.S. Consumer Spending Up 0.5% in November

Americans stepped up their spending in November, boding well for holiday sales and offering the latest sign the U.S. recovery is gaining momentum.

Personal consumption, reflecting what consumers spend on everything from televisions to health care, climbed 0.5% in November from a month earlier, the fastest pace since June, the Commerce Department said Monday. The gain was driven by a boost in spending on big-ticket items, more than half of which came from automobile and parts buying, and on services.

But tepid income growth could limit future gains. Personal income increased 0.2% in November after falling 0.1% in October. As a result, consumers dipped into their savings to maintain their spending. (…)

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The price index for personal consumption expenditures, the Federal Reserve’s preferred gauge for inflation, was flat in November from a month earlier, the second consecutive month prices went unchanged. From a year earlier, prices were up 0.9% in November, after being up 0.7% in October.

Core prices, which exclude volatile food and energy costs, rose 0.1% from October and 1.1% from a year prior.

Nerd smile What’s wrong with this chart?

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Personal income gained a disappointing 0.2% (2.3% y/y) after a minimal dip in October. Disposable personal income increased just 0.1% (1.5% y/y), held back by a 0.8% rise (9.0% y/y) in tax payments. Wages & salaries increased 0.4% but the 2.2% year-to-year increase was the weakest since mid-2010.

Real disposable income rose 0.3% during the last 3 months, a very weak 1.2% annualized rate that lead to a very low 0.6% YoY increase in November. Meanwhile, real expenditures rose 1.1%, a 4.5% annualized rate. November real spending was up 2.6% YoY. Americans just keep dissaving to sustain their living standard. For how long?

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Meanwhile, Christmas sales are fuzzy:

This chart plots weekly chain store sales which have been in a narrow +2.0-2.3% YoY gain channel since the spring. Weak!

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But Online Sales Jumped 37% During Weekend

(…) After mall-traffic tracker ShopperTrak on Monday reported a 3.1% decline in holiday in-store sales and a 21% plunge in store traffic in the crucial shopping week ended Sunday, additional data again suggest a much brighter picture online. Total online sales from Friday through Sunday surged 37% year-to-year, with mobile traffic representing two-fifths of all online traffic, according to IBM Digital Analytics. Consumers buying from their mobile devices sent mobile sales up 53%, accounting for 21.5% of all online sales, IBM said. (…)

Sad smile With what looks to be a disappointing holiday season, Retail Metrics’ Ken Perkins said Tuesday that fourth-quarter retail sales for the 120 chains it tracks is now expected to rise just an average of 1.9%, the weakest since third-quarter 2009. Profit growth is expected to be just 1.3%, also the weakest since third-quarter 2009, “when retailers were still clawing their way out of the Great Recession.”

Fourth-quarter same-store sales are expected to rise an unimpressive 1.1%.

“It has been a very disappointing holiday season to date for most of retail,” said Mr. Perkins.

Late Surge in Web Buying Blindsides UPS, Retailers A surge in online shopping this holiday season left stores breaking promises to deliver packages by Christmas, suggesting that retailers and shipping companies still haven’t fully figured out consumers’ buying patterns in the Internet era.

(…) E-commerce accounts for about 6% of overall U.S. retail sales, according to the Commerce Department. This holiday season, online purchases will be nearly 14% of sales, estimates the National Retail Federation.

During the last shopping weekend before Christmas, Web sales jumped 37% from the year before, according to IBM Digital Analytics. Market research firm Forrester Research expects online sales to increase 15% this holiday season amid slow mall traffic and weak sales at brick-and-mortar retailers.

Coming back to the slow income growth trends:

 

Mortgage Applications Drop to 13-Year Low

The average number of mortgage applications slipped 6.3% to a 13-year low on a seasonally adjusted basis as interest rates rose from the previous week, the Mortgage Bankers Association said.

Following last week’s 6.1% drop, applications for purchase mortgages were down another 3.5% w/w to the lowest level since February 2012. The purchase index is currently tracking down 11.5% y/y. (…)  Application activity remains below both the recently reported y/y growth in new home sales (+22% in October) and existing home sales (-1.2% in November), led by a declining mix of first-time buyers within both segments. Recent data also suggests mortgage credit availability has tightened slightly more. (…)

The average contract rate on 30-year fixed conforming mortgages increased 2 bp w/w to 4.64%, matching the highest level since September, and is now up 105 bp since bottoming during the week ended May 3. Overall mortgage rates are up 113 bp y/y, as the spread relative to the 10-year Treasury note has now expanded 1 bp y/y to 175 bp.

BTW, FYI:

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Calm returns to China’s money markets Central bank skips open market operations

China Expects 7.6% Growth in 2013 China’s economy will post growth of 7.6% for all of 2013, a top planning official said, indicating that the world’s second-largest economy will exceed Beijing’s 7.5% target but that it also lost momentum in the final months of the year.

(…) China’s economy posted year-over-year growth of 7.8% in the third quarter after expanding at 7.7% in the first quarter and 7.5% in the second quarter amid a still sluggish global economy. A “mini-stimulus” of government investment in rail and subway construction coupled with tax and other business incentives helped boost growth in the July-September period. (…)

Ninja I suspect the Chinese are spying on NTU which revealed the Q4 slowdown on Dec. 18.

Christmas spirit does little for Spain
Subdued domestic demand weighs on the economy

(…) Retail sales are still a quarter lower than they were before Spain slid into economic crisis more than five years ago, and some shop owners say they have seen little change in consumer behaviour so far. (…)

Until now, the recovery has been driven almost exclusively by rising exports, with domestic demand acting as a drag on growth. The surge in shipments to foreign markets was sufficiently strong to lift Spain out of recession in the third quarter this year, and has given companies the confidence to start investing in plants and machinery. But economists warn that Spain will be stuck with anaemic growth at best as long as domestic demand remains as subdued as it is now.

There are some signs of hope. According to the Bank of Spain, the decline in overall household consumption slowed in the third quarter. Spanish retail sales actually rose 2.1 per cent on an annual basis in September, the first such increase in more than three years, but fell back into negative territory the next month. Consumer confidence has risen sharply and car sales – helped by a government subsidy programme – are also up.

Javier Millán-Astray, director-general of Spain’s association of department stores and retail chains, notes that sales on the first big shopping weekend of the holiday season were up 8 per cent compared with last year, and predicts an overall rise in Christmas sales of 6-7 per cent compared with 2012. “We have seen a change in the trend since August. Sales have still been falling but the drops are much smaller than before. And the truth is that the first weekend of the Christmas season was much better than the year before.” (…)

 
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NEW$ & VIEW$ (20 DECEMBER 2013)

The Fed is actively engaged in a communication blitz to convince investors that tapering is no big deal.

Fed’s Mortgage Role Expands The central bank’s asset purchases are a bigger share of the market as it begins to taper its bond-buying program.

(…) Because bond production has tumbled, the Fed’s share of total mortgage-bond purchases has risen significantly over the past three months.

The Fed bought about 90% of new, eligible mortgage-bond issuance in November, up from roughly two-thirds of such bonds earlier this year, according to data from J.P. Morgan Chase & Co. The Fed’s large role in the mortgage market means that even as it reduces its bond purchases, the market could enjoy considerable support from the central bank in the near term.

Well, we’ll see how things go as the elephant in the room is trying to back up through the front door.

Mortgage rates stood at 4.6% last week for the average 30-year, fixed-rate mortgage, according to the Mortgage Bankers Association. Rates had been as low as 3.6% in May.

The yield on the 10-year Treasury note, a key driver of trading in mortgage markets, hit a three-month high Thursday at 2.923%. (…)

The Fed’s plan to purchase at least $35 billion in mortgage securities in January compares with market-wide net mortgage-bond issuance of about $18 billion a month in recent months, said Mr. Jozoff. (…)

Despite taking initial steps to reduce its asset purchases, the Fed “will be still expanding our holdings of longer-term securities at a rapid pace,” said Federal Reserve Chairman Ben Bernanke at a news conference on Wednesday. “We’re not doing less,” Mr. Bernanke said. “I would dispute the idea that we’re not providing a lot of accommodation to the economy.” (…)

Mortgage applications fell to a 13-year low last week, a sign that mortgage volumes could remain low for now. (…)

Even Markit plays the Fed’s tune: Fed tapers as outlook improves, removing one more global economic uncertainty

Something that many overlooked – especially back in May, when talk of taper first appeared – is that the taper is not a tightening policy. It is merely a reduction in the pace at which the central bank is pumping money in to the financial markets. That total, which has been growing at $85bn every month since the Fed embarked on its third wave of Quantitative easing 15 months ago, will instead grow by $75bn per month from January onwards.

Ask any junky what happens during tapering (see Withdrawal Syndrom)

Remember, we are all parts of this huge experiment.

By the way:

 

  • U.S. Existing Home Sales Down 4.3% Sales of previously owned homes slipped to the lowest level in nearly a year in November, signaling that higher mortgage rates are making buyers wary.

Existing-home sales decreased 4.3% from the prior month to a seasonally adjusted annual rate of 4.9 million, the National Association of Realtors said Thursday. Home sales fell by 1.2% from a year earlier, the first time in 29 months the year-over-year figure declined. (Chart from ZeroHedge)

  • From National Bank Financial:

The US housing market is facing some headwinds as evidenced by existing home sales which, in November, fell to the lowest since late 2012. The slump shouldn’t be entirely surprising considering the decline in
mortgage loans, the latter on pace to contract in Q4 at the fastest pace since 2011. Rising long rates partly explain why mortgage loans are drying up, but bad credit among one important segment of the population can also be having a detrimental effect.

Indeed the youth seem to be finding it difficult to qualify for loans
due to the lack of job opportunities but also due to bad credit. Note the disproportionate increase in student loan delinquencies in recent years.

And as today’s Hot Charts show, that may explain why the homeownership rate among the youth has dropped in recent years at a faster pace than that of any other age segment. So, barring new government measures to help address student debt and delinquencies, it may take longer for the housing market to fully recover from the crash that triggered the Great Recession. That’s one of the reasons why we expect home price inflation in 2014 to moderate somewhat from this year’s hot pace.

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Currently, the U.S. economy is forming just over 400,000 new households per year as of the third quarter of 2013, significantly below the long-term average of just under 1.2 million. Given current population growth, America should be forming roughly 1 million new households each year.

However, the latest recession was so severe that it continues to suppress household formation. One piece of evidence: A growing percentage of young adults aged 18-34 are living with their parents. (…) We believe the “American Dream” of home ownership is intact and note the recent uptick in the home ownership rate as evidence of pent-up demand and an improving outlook for household formation given rising wealth and stronger job creation.

Kiesel just forgot to mention that rising wealth may not be reaching the 18-34 cohort just yet, while rising mortgage rates and restrictive credit scores are.

Philly Fed Weaker Than Expected

Just one day after the Fed announced a $10 billion taper to its monthly asset purchase program, the economic data has not been very good.  Of the five economic indicators released on Thursday, four came in weaker than expected.  One of those indicators was the Philly Fed report.  While economists were expecting the headline reading to come in at a level of 10, the actual reading was 7.0, which represented a slight increase from November’s reading of 6.5.

As shown, four of the nine components declined this month, led lower by Delivery Time and Prices Paid. The decline in Prices Paid should be a good sign for the Fed as it implies that inflation pressures remain contained.  On the upside, we saw the greatest improvement in Average Workweek and Shipments.  All in all, this morning’s report was pretty much neutral, but with a string of weaker than expected economic data just one day after the ‘taper’ was announced, one wonders if anyone at the Fed is beginning to have second thoughts.

High five Slight oversight by Bespoke: New Orders remain strong.

Jobless Claims Highest Since March

Jobless claims came in significantly higher than expected for the second straight week today (379K vs. 334K).  This week’s reading exceeded the spike we saw during the government shutdown and was the highest reading since March.  While the BLS blamed normal seasonal volatility, if the seasonality was so ‘normal’ why was it unexpected?  While last week’s rise was written off as a one off, two weeks is a little more notable.

After the increases of the last two weeks, the four-week moving average rose to 343.5K.  If the elevated levels of the last two weeks continue, it will start showing up more in this figure and that would be troubling especially given the Fed’s timing of the taper yesterday.

Conference Board Leading Economic Index: Fifth Month of Growth
 

The Conference Board LEI for the U.S. increased for the fifth consecutive month in November. Positive contributions from the yield spread, initial claims for unemployment insurance (inverted), and ISM® new orders more than offset negative contributions from consumer expectations for business conditions and building permits. In the six-month period ending November 2013, the leading economic index increased 3.1 percent (about a 6.4 percent annual rate), faster than the growth of 2.0 percent (about a 4.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

Click to View
 

No recession in sight. Thumbs up

China cash injection fails to calm lenders
Stocks slide as money market rates stay dangerously high

An emergency cash injection by the Chinese central bank failed to calm the country’s lenders as money market rates climbed to dangerously high levels.

Analysts cited a variety of technical factors for the tightness in the Chinese financial system, but the sudden run-up in rates was an uncomfortable echo of a cash crunch that rattled global markets earlier this year.

Concerns focused on the rates at which Chinese banks lend to each other. The seven-day bond repurchase rate, a key gauge of short-term liquidity, was emblematic of their reluctance to part with cash. It averaged 7.6 per cent in morning trading on Friday, its highest since the crunch that hit China in late June. That was up 100 basis points from Thursday and far above the 4.3 per cent level at which it traded just a week ago.

The sharp increase occurred despite the central bank’s highly unusual decision to conduct a “short-term liquidity operation” on Thursday, providing a shot of credit to lenders struggling for cash. In a clear sign of its concern at the stress in financial markets, the People’s Bank of China used its account on Weibo, China’s version of Twitter, to announce the SLO. According to the central bank’s own rules, it is only supposed to confirm SLOs one month after completing them.

The China Business News, a state-owned financial newspaper, reported that the short-term injection was worth Rmb200bn ($33bn), a large amount. But traders blamed the central bank for letting market conditions deteriorate to the point of needing an emergency injection in the first place. The PBoC steadfastly refused to add liquidity to the market in recent weeks despite the banking system’s regular year-end scramble for cash.

Pointing up Lu Ting, an economist with Bank of America Merrill Lynch, said China’s financial system was entering a new era and policy makers were struggling to adapt. “The PBoC is faced with some serious challenges . . . and is confused,” he said. “The PBoC finds it much more likely than before to make [operational] mistakes.”

Mr Lu said he was confident that China would avoid a full-fledged repeat of June’s cash crunch because the central bank did not want to see an over-tightening of monetary conditions. Rather, he and other analysts said the PBoC appeared to have misjudged the flow of funds in the economy. (…)

 
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NEW$ & VIEW$ (18 DECEMBER 2013)

Low Inflation Tests World’s Central Banks Inflation is slowing across the developed world despite ultralow interest rates and unprecedented money-printing campaigns, posing a dilemma for the Fed and other major central banks as they plot their next policy moves.

U.S. consumer prices rose just 1.2% in November from a year earlier, according to Labor Department data released Tuesday.

Meanwhile, annual inflation in the euro zone was 0.9% in November, the European Union’s statistics office said Tuesday. And central banks in Sweden and Hungary cut interest rates, the latest efforts elsewhere in Europe to boost struggling economies as inflation remains low. (…)

Central bankers worry about inflation falling too low because it raises the risk of deflation, or generally falling prices, a phenomenon that is difficult to combat through monetary policy. Some economists believe weak or falling prices can lead consumers to delay major purchases, exacerbating an economic slowdown. Even without deflation, very low inflation can be a sign of weak demand that weighs on wages, corporate profits and growth.

Low Inflation Tests World Central Banks

BEWARE COMPLACENCY ON U.S. INFLATION

The CPI less food and energy, also called core inflation, increased 0.2% (1.9% annualized rate) on a seasonally adjusted basis, after 3 months of consecutive 0.1% montlhy gains.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in November. Median prices have been rising by 0.2% in 7 of the past 8 months,

Over the last 12 months, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%

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Mug Is The Fed Driving You To Drink? 

Correlations!

LET’S HOPE HE’S RIGHT:

Gasoline prices will reach $3.15 by the end of the year, according to Andy
Lipow, president of Lipow Oil Associates LLC. “We’re going to see significant increases in gasoline inventories the next few weeks,” he said. “Refiners will maintain their high rates of utilization while demand declines toward its seasonal low in January and February.”

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Although low oil prices don’t necessarily mean low inflation anymore (chart from BMO Capital):

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Nerd smile MORE ON INFLATION COMPLACENCY

U.S. Productivity Slows, Labor Costs Rise

Revised Q3 data show labor productivity among nonfarm firms rose 3.0% annualized in the quarter and unit labor costs fell 1.5%. But the quarterly data mask a clear slowing trend in productivity this year (0.3% y/y) and a pickup in unit labor costs (2.1%). The former hints at further strength in employment, as the low-hanging productivity fruit of recent years is largely picked. But, it also implies higher unit labor costs and somewhat firmer inflation in 2014. (BMO Capital)

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The deceleration to zero productivity growth, which has a direct link to profit margins, will finally incentivize the business sector to invest organically in their own operations with belated positive implications for capex growth. (David Rosenberg)

Keep in mind that the current low labour participation rate technically means that the supply of labour is tight. And this:

On December 4th Barack Obama called for a higher federal minimum wage. He has previously suggested that it rise from $7.25 to $10.10.

Even though

In 1979 7.9% of workers toiled at or below the federal minimum wage; last year 2.8% did. From January 1st 21 states will have a minimum wage higher than the federal one. More may introduce one next year; others will raise theirs further. (The Economist)

Add that:

Mortgages To Get Pricier Next Year

Consumers can expect to pay more to get a mortgage next year, the result of changes meant to reduce the role that Fannie Mae and Freddie Mac play in the market.

The mortgage giants said late Monday that, at the direction of their regulator, they will charge higher fees on loans to borrowers who don’t make large down payments or don’t have high credit scores—a group that represents a large share of home buyers. Such fees are typically passed along to borrowers, resulting in higher mortgage rates. (…)

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don’t have down payments of at least 20% and who have credit scores of 680 to 760.

A borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 and making a 10% down payment, for instance, would pay fees totaling 2% of the loan amount, up from 0.75% now. The 2% upfront fee could raise the mortgage rate by around 0.4 percentage points.

Borrowers with larger down payments could also be affected. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%. (…)

The changes follow other announcements in recent weeks that could raise loan costs for some borrowers. The Federal Housing Administration, a government agency that guarantees loans with down payments as small as 3.5%, said earlier this month that it would drop the maximum loan limit in around 650 counties. In San Bernardino, Calif., for example, the loan limit will fall to $335,350 next month from the current level of $500,000.

Separately, the FHFA said Monday it would study reducing the loan amounts that Fannie and Freddie guarantee by around 4%, bringing the national limit to $400,000 from its current level of $417,000. Those changes won’t take effect before October 2014, the agency said.

 U.S. mortgage applications fall in latest week: MBA

Applications for home mortgages fell last week, dropping to a multi-year low, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.5 percent to 374.6 in the week ended December 13.

The index has fallen for six of the past seven weeks. Mike Fratantoni, MBA’s vice president of research and economics, said the index dropped to its lowest “in more than a dozen years… as interest rates increased going into today’s Federal Open Market Committee meeting.”

The MBA’s seasonally adjusted index of refinancing applications fell 4.3 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, lost 6.1 percent. (Chart from CalculatedRisk)

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 Japanese Exports Rise

The volume of merchandise exports in November—seen as a more reliable gauge of underlying strength than value terms—rose 6.1% from a year earlier, the Ministry of Finance announced Wednesday. The increase was the sharpest in a year and a half, and compares with a 4.4% rise in October.

Exports to Asia rose 5.9% in volume terms, the most in more than two and a half years, offsetting a slowdown to the U.S. and Europe.

Japanese manufacturers exported a total 512,432 automobiles in November, up 9.4% from a year earlier, the fastest rise in about a year and a half. They also shipped 67,000 motorcycles, up 7.0%, faster than the previous month’s 4.5% rise.

CHINA ECONOMY NOT ABOUT TO ACCELERATE

From CEBM Research:

The adjusted new orders manufacturing PMI between 2011 and 2013 have been significantly lower than in 2010 and remained range-bound. No sign of a breakthrough has yet been observed.

Consumption is a relatively positive component in 1Q14, as consumption
experienced a significant decrease due to the anti-corruption movement in 2013. However, based on our survey, general consumption, including
department stores, retail and restaurants, are not very strong, as the CEBM Consumption Index has hit a 6-year low. Therefore, an upside trend in consumption in 1Q14 is limited.

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The volume of transactions in Canton Fair leads exports by 6 months.
Transaction volume Y/Y at this autumn’s Canton Fair is lower than the Fair this spring. Given this correlation, exports in 1H14 are not likely to
accelerate.

Another indicator for weakening exports is US GDP. Except 1H13, when the abnormally high growth of exports may have been due to false foreign trade to take advantage of interest rate arbitrage, US GDP Y/Y and China’s exports Y/Y are correlated. Because US GDP Y/Y is likely to be lower in the first half of 2014 and higher in the second half, Chinese exports are unlikely to accelerate in 1H14.

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From National Bank Financial:

Year-on-year export growth has stabilized at around 8% overall, or
roughly 5% excluding exports to Hong Kong. And with the yuan now at an all-time high in real effective terms according to latest data from the Bank of International Settlements, it will be a tall order for exporters to increase growth over the coming years.

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CHINA’S DOMESTIC ECONOMY HAS ITS OWN HEADWINDS

Samsung Shifts Plants From China to Protect Margins

Samsung Electronics Co. (005930) built the world’s largest smartphone business by tapping China’s cheap and abundant workforce. Not for much longer: it’s shifting output to Vietnam to secure even lower wages and defend profit margins as growth in sales of high-end handsets slows.

By the time a new $2 billion plant reaches full production in 2015, China’s communist neighbor will be making more than 40 percent of the phones that generate the majority of Samsung’s operating profit. The Suwon, South Korea-based company’s second handset factory in Vietnam is due to begin operations in February, according to a Nov. 22 statement on the local government’s website. (…)

“The trend of companies shifting to Vietnam from China will likely accelerate for at least two to three years, largely because of China’s higher labor costs,” said Lee Jung Soon, who leads a business-incubation team of the Korea Trade-Investment Promotion Agency in Ho Chi Minh City. “Vietnam is really aggressive in fostering industries now.” (…)

Intel, the world’s largest chipmaker, opened a $1 billion assembly and testing plant in Ho Chi Minh City in 2010. Nokia said its facility near Hanoi producing Asha smartphones and feature handsets became fully operational in the third quarter. LG Electronics Inc. (066570), Samsung’s smaller South Korean rival, is building a new 400,000 square meter complex to make TVs and appliances as part of a $1.5 billion investment plan. (via Grant Williams)

China November Homes Prices Rise as Shenzhen Posts Record Gain

Shenzhen and Guangzhou posted increases of 21 percent from a year earlier, while prices climbed 18 percent in Shanghai and 16 percent in Beijing, data from the National Bureau of Statistics showed today. Prices rose from a year earlier in 69 of 70 cities tracked by the government last month, it showed.

The value of November home sales climbed to the highest in almost two years, to 720.4 billion yuan($119 billion), the statistics bureau said last week.

 
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NEW$ & VIEW$ (10 DECEMBER 2013)

Small Businesses Optimism Up Slightly

Owner sentiment increased by 0.9 points to 92.5, a dismal reading as has
been the case since the recovery started. Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels. Expected business conditions though deteriorated further – lots of dismal views of the economy coming next year. The Index has stayed in a “trading range” between 86.4 and 95.4 since the recovery started, poor in comparison to an average reading of 100 from 1973 through 2007.

Small business optimism report data through November 2013

The net percent of all owners (seasonally adjusted) reporting higher
nominal sales in the past 3 months compared to the prior 3 months was
unchanged at a negative 8 percent. Fifteen percent still cite weak sales as
their top business problem, but is the lowest reading since June 2008. The
net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.

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The pace of inventory reduction continued with a seasonally adjusted net
negative 7 percent of all owners reporting growth in inventories, 1 point
worse than in October. The negative outlook for the economy and real
sales prospects adversely impacted inventory satisfaction. The net percent
of owners viewing current stocks as too low improved only 1 point, to
negative 4 percent in November. Inventories are too large, especially given the poor outlook for sales improvements. The net percent of owners
planning to add to inventory stocks was a net 0 percent (up 1 point), no
new orders for inventory when stocks are excessive compared to expected
sales.

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WEEKLY CHAIN STORE SALES SHOW NO HOLIDAY CHEERS

Sales dropped 1.6% last week after the 2.8% decline the previous week. The growth in the 4-week m.a. is 2.2% YoY. It was 3.0% at the same time last year when the Christmas season sales finished up 3.3% by this measure.

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Smile Americans Regain Some Wealth

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, the highest on record, according to the Federal Reserve.

cat

The value of stocks and mutual funds owned by households jumped $917 billion last quarter, while the value of residential real estate grew about $428 billion, according to the Fed. (…)

Sad smile Wealthy Go Frugal This Holiday Amid Uneven U.S. Recovery

(…) Coach Inc. has said customers plan to spend less on gifts and that mall traffic fell sharply last month. Analysts predict Nordstrom Inc.’s fourth-quarter sales may grow less than half the year-ago pace of 6.1 percent. Tiffany & Co.’s third-quarter comparable sales in the Americas were barely higher. Even before Black Friday, Saks Inc., Neiman Marcus Group Inc. and Nordstrom offered 40 percent off on many brands. (…)

In early October, Unity Marketing conducted an online survey of 1,200 affluent shoppers. Twenty five percent said they’ll spend less on holiday gifts this year than they did in 2012, while 60 percent said they plan to spend the same. Just 13 percent said they would spend more.

Half the respondents said the financial health of the country is worse now than it was three months ago. (…)

First rise in US mortgage debt since 2008
Consumer spending may support economic growth next year

The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008.

After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9 per cent in the third quarter of 2013, according to new data from the US Federal Reserve. (…)

Total household credit grew at an annualised pace of 3 per cent, a little slower than the growth of nominal GDP, while credit in the business sector expanded at a pace of 7.5 per cent. (…)

Canada’s top 1% take home 10.6% of its income

A first glimpse of how top earners fared in 2011 shows their share of income peaked in 2006 at 12.1 per cent, before the recession walloped the wealthy as investment income and bonuses dried up. However, the share is still higher than when Statistics Canada began tracking incomes in 1982, when it stood at 7.1 per cent. (…)

In the U.S., the income share of the top 1 per cent of earners was 19.7 per cent in 2011, according to economists Emmanuel Saez and Thomas Piketty. By last year, it had grown to about 22.5 per cent – a similar level to both before the recession and the Great Depression. The economists found that incomes for the top 1 per cent grew by nearly a third between 2009 and 2012, compared with 0.4-per-cent growth for the bottom 99 per cent.

In Canada, the threshold to be in the top percentile of earners rose to $209,600 in 2011, up from $207,300 a year earlier in constant dollars. It requires $108,300 to be part of the top 5 per cent, while it takes $84,100 to be in the top decile of earners.

The rich typically pay a higher share of taxes in Canada, although that share has declined in recent years. The top 1 per cent of earners paid 20.8 per cent of the total share of federal and provincial or territorial income taxes, down from 23.3 per cent five years earlier. (…)

The top 5 per cent of earners in Canada held 23.8 per cent of total income in 2011, while the top 10 per cent received 35.1 per cent. The report is based on 2011 tax-file data, which includes incomes from earnings and investments, but is not a measure of total wealth, which includes assets such as housing.

Signs Investment Slowing in China

(…) retail sales beat expectations, while investment lost momentum, a sign of progress toward the consumption-led growth policy makers have sought. Retail sales posted 13.7% annual growth in November, up from 13.3% in October, and auto sales hit a record high. (…)

Overall investment showed signs of slowing in November, though real-estate sales and construction starts were strong. Fixed-asset investment was up 19.9% in the first 11 months of the year, compared with the same period of 2012, just below expectations and lower than the figure for the January-to-October period. (…)

Growth in industrial production, the most closely watched monthly indicator of economic performance, slipped back to 10% on a year-to-year basis in November from 10.3% the previous month. (…)

Auto  China Auto Sales Gain 16% as Japan Automakers Extend Recovery

China’s passenger-vehicle sales rose 16 percent in November as Japanese automakers extended their recovery in the world’s largest auto market.

Wholesale deliveries of cars, multipurpose and sport utility vehicles climbed to 1.7 million units last month, the state-backed China Association of Automobile Manufacturers said today. (…)

Industrywide, total sales of vehicles — including buses and trucks — reached 19.9 million units this year through November, putting China on course to be the first country to ever see 20 million units in annual vehicle sales. (…)

By contrast, Indian passenger-vehicle sales fell 10 percent last month, the third-straight decline, according to data released by the Society of Indian Automobile Manufacturers today.

Ghost  France’s Industrial Production fell 0.3% in October, following a 0.3% decline in September.

SENTIMENT WATCH

over the past 3 weeks a cumulative ~15B flowed into equity mutual funds while-$17B flowed out of Bond Mutual funds. (ISI)

 
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NEW$ & VIEW$ (6 DECEMBER 2013)

Business Stockpiling Fuels 3.6% GDP Rise

The economy grew at a faster pace in the third quarter than first thought, but underlying figures suggest slower growth in the year’s final months.

catGross domestic product, the broadest measure of goods and services produced in the economy, grew at a seasonally adjusted annual rate of 3.6% from July through September, the Commerce Department said Thursday. The measure was revised up from an earlier 2.8% estimate and marks the strongest growth pace since the first quarter of 2012.

High five The upgrade was nearly entirely the result of businesses boosting their stockpiles. The change in private inventories, as measured in dollars, was the largest in 15 years after adjusting for inflation.

As a result, inventories are likely to build more slowly or decline in the current quarter, slowing overall economic growth. The forecasting firm Macroeconomic Advisers expects the economy to advance at a 1.4% rate in the fourth quarter. Other economists say the pace could fall below 1%.

Real final sales—GDP excluding the change in inventories—rose just 1.9%, a slowdown from the second quarter. Consumer spending advanced only 1.4%, the weakest gain since the recession ended.

This huge inventory bulge may explain the bullish manufacturing PMIs of the past few months as Lance Roberts writes today:

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I posted on the apparent inventory overhang Wednesday, particularly at car manufacturers but also in retail stores as can be easily seen at any mall near you. Right on cue:

Honda Offers Dealers Incentives

Honda is offering its U.S. dealers big cash incentives to pump up their new-car sales in the final month of the year after its November U.S. sales fell slightly even as the overall market rose nearly 9%.

Honda told dealers on Wednesday it would pay bonuses of $3,000 for every vehicle they sell above their December 2012 sales total, according to dealers briefed by the company. Retailers can use the extra money to drop prices on new vehicles or finance other incentives to persuade customers to buy.

Auto makers often offer similar bonuses to their dealers, but Honda’s new program is noteworthy because the Japanese company typically offers much less in sales incentives than its competitors.

Honda’s program is being rolled out amid signs that other major auto makers in the U.S. also are sweetening rebates and other sales promotions.

Lance Roberts reminds us of the importance of final demand which is at really uncomfortably low levels:

Real final sales in the economy peaked in early 2012 and has since been on the decline despite the ongoing interventions of the Federal Reserve.  The lack of transmission into the real economy is clearly evident.

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Furthermore, as shown in the next chart, consumer spending has continued to weaken since its peak in 2010.  The last couple of quarters has shown a noticeable decline is services related spending as budgets tighten due to lack of income growth as disposable personal incomes declined in the latest report.  The slowdown in dividends, wages and salaries were partially offset by a rise in social welfare and government benefits.  Unfortunately, rising incomes derived from government benefits does not lead to stronger economic growth.

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The latest GDP data are for Q3. The last and most important quarter of the year is off to a slow pace:

Retailers Post Weak November Sales

The nine retailers tracked by Thomson Reuters recorded a 1.2% increase in November same-store sales, or sales at stores open at least a year, versus the 2.3% consensus estimate and the 5.1% increase posted a year ago.

The 1.2% result is the weakest result since September 2009′s 0.7% result.  Off-price retailers continue to outperform the sector, suggesting shoppers still want designer brand names for less. Companies that missed expectations blamed the shorter holiday season, very competitive and difficult environment.

Hopefully, this will help:

U.S. Crude-Oil Glut Spurs Price Drop

The U.S. Gulf Coast—home to the world’s largest concentration of petroleum refineries—is suddenly awash in crude oil. So much high-quality oil is flowing into the area that the price there has dropped sharply.

So much high-quality U.S. oil is flowing into the area that the price of crude there has dropped sharply in the past few weeks and is no longer in sync with global prices.

In fact, some experts believe a U.S. oil glut is coming. “We are moving toward a significant amount of domestic oversupply of light crude,” says Ed Morse, head of commodities research at Citigroup.

And the glut on the Gulf Coast is likely to grow. In January, the southern leg ofTransCanada Corp.’s Keystone pipeline is set to begin transporting 700,000 barrels a day of crude from the storage tanks of Cushing, Okla., to Port Arthur, Texas.

The ramifications could be far-reaching, including lower gasoline prices for American drivers, rising profits for refineries and growing political pressure on Congress to allow oil exports. But the glut could also hurt the very companies that helped create it: independent drillers, who have reversed years of declining U.S. energy production but face lower prices for their product.

Globally, the surge in supply and tumbling prices are attracting notice. On Monday, a delegate to the Organization of the Petroleum Exporting Countries said Saudi Arabia is selling oil to the U.S. for less than it would fetch in Asia. Nonetheless, the Saudis have continued to ship crude to refineries they own in Texas and Louisiana, according to U.S. import data, further driving down prices.

The strongest indication of a glut is the falling price of “Louisiana Light Sweet,” a blend purchased by refiners along the Gulf Coast. Typically, a barrel of Louisiana Light Sweet costs a dollar or two more than a barrel of crude in Europe.

But on Wednesday, a barrel of Louisiana crude fetched $9.46 less than a barrel of comparable-quality crude in England. (…)

Some industry officials argue that U.S. light crude will simply displace more “heavy” imported oil. But many Gulf Coast refineries are set up to turn the more viscous crude into diesel fuel, and converting their facilities to process additional light oil wouldn’t be easy. (…)

San Antonio-based Valero, the nation’s largest oil refiner, all but stopped importing lightweight crude to the Gulf Coast and Memphis a year ago because there was so much U.S. product available, says spokesman Bill Day. It is also shipping crude from Texas and Louisiana all the way up to its refinery in Quebec because the price of Gulf Coast oil is so low. (…)

How about feeding New York City where prices are 17% higher than in Houston, Tx.? (Obama focuses agenda on relieving economic inequality) Winking smileBut this can’t help housing, even with the Fed trying as hard as it can:Neither can this:

While higher mortgage rates have moderated U.S. home sales recently, the potential supply of buyers has also taken a surprising step back. Annual household formations are running well below one-half million recently, compared with a three-decade norm of 1.1 million. This is surprising given that the echo boomers are old enough to leave the familial home by now—unless they simply can’t find work and feel compelled to stay there. (BMO Capital)

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TOUGH TO BE CONSTRUCTIVE ABOUT EUROPE

However you look at it, the pattern is the same: strong and stronger Germany (20% of EU GDP, 16% of EU population), weak and weaker France (16%, 13%) and Italy (12%, 12%).

  • German construction sector growth helps drive economic expansion The construction industry looks set to provide a boost to the German economy in the fourth quarter, according to Markit’s PMI data. The construction PMI – which measures the overall level of business activity in the sector – registered expansion for the seventh successive month in November. Although the headline index dipped slightly from 52.6 in October to 52.1, the average reading in the fourth quarter so far is consistent with the sector’s output rising by some 7% compared to the third quarter.
  • France: Construction sector downturn deepens The downturn in France’s construction sector gathered pace in November. Activity and new orders both fell at sharper rates, while the pace of job shedding quickened. Confidence regarding the year-ahead outlook meanwhile plunged to the lowest in 2013 to date.
  • Italian construction sector set to post contraction in final quarter Italy’s construction sector looks set to remain a drag on GDP in the final quarter of the year, with businesses in the industry having recorded further reductions in total activity levels in both October and November. The latest contraction was the slowest in five months, but nevertheless still solid overall and broad based across the housing, commercial and civil engineering sectors.

German Factory Orders Decline in Sign of Uneven Recovery

Orders, adjusted for seasonal swings and inflation, slid 2.2 percent from September, when they rose a revised 3.1 percent, the Economy Ministry in Berlin said today. Economists forecast a decline of 1 percent, according to the median of 40 estimates in a Bloomberg survey. Orders advanced 1.9 percent from a year ago when adjusted for the number of working days.

Foreign orders fell 2.3 percent in October, while those from within the country dropped 2 percent, today’s report showed. Demand from the euro area declined 1.3 percent.

EURO BANKS NEED MORE WORKOUTS:

(Morgan Stanley)

Red heart Thank You All

I have not been able to personally and directly thank all of you who reacted to my help demand last Tuesday. While it was on a rather minor thing, I am relieved to see that if I ever lost my mind, my readers from across the world will surely help.

Your kind words were also nice to read. I am happy to see I can help some, me being first in line, remain focused, objective and disciplined.

I wish I had advised you to buy bitcoins early this year but you just paid me handsomely with your buddycoins!

Other harmless ways readers can contribute to this absolutely free blog is by clicking on the ads on the sidebar from time to time just to encourage my advertisers to stay with me and/or to use the Amazon search box on the sidebar to reach the Amazon web site before ordering. This will earn News-To-Use a small referral fee. All moneys received are reinvested into research material, less and less of which if free.

 
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NEW$ & VIEW$ (4 DECEMBER 2013)

Smile Companies Boost U.S. Payrolls by Most in a Year

The 215,000 increase in employment exceeded the most optimistic forecast in a Bloomberg survey and followed a revised 184,000 gain in October that was larger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of economists called for a 170,000 advance.

Auto CAR SALES NOT AS STRONG AS HEADLINES SUGGEST

 

WSJ:  Brisk Demand Lifts Auto Sales

(…) Overall, demand remained strong with 1.25 million light vehicles sold last month, up 9% from a year ago, lifting the annualized sales pace to 16.4 million vehicles, from 15.3 million a year ago and the strongest pace since February 2007, according to Autodata Corp.(…)

Haver Analytics: U.S. Vehicle Sales Surge to Seven-Year High

The latest level of sales was the highest since February 2007.

But sales had been quite weak in both September and October at 15.2M, the former due to fewer selling days and the latter presumably due to the government shutdown. Taking a 3-month moving average, the annualized selling rate has been flat at 15.6M since June 2013, even though manufacturers’ incentives have kept rising briskly. (Chart from CalculatedRisk)


Doug Waikem, owner of several new-car dealerships in Ohio, said discounts aren’t “out of control” but car makers are pushing retailers to buy more vehicles, a practice that boosts auto maker’s revenue.

“I think we’re slipping back into old habits,” Mr. Waiken said. “I’m seeing dealers with inventories going up. The banks are being very aggressive.”

On Nov. 20, I warned about a possible build up in car inventories if sales don’t accelerate rapidly. Monthly inventories of the Detroit Three were at a high 76 days in October.

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. Company executives said the inventory levels are acceptable for this time of year.

Well, not really acceptable to Ford:

Ford announced its initial Q1/14 production schedule, with volumes expected to decline 2% year over year, which is slightly worse versus the most recent forecast from Ward’s Automotive for Ford’s production to increase by 2% year over year in Q1/14 and compares to our estimate for overall Detroit Three production to increase 4% year over year in Q1/14. (BMO Capital)

The risk remains that car sales, having bounced thanks to the wealth effect and pent up demand, have reached their cyclical peak.

 

More inventory problems:

Inventories Threaten to Squeeze Clothing Stores

Chains including Abercrombie & Fitch Co., Chico’s FAS Inc., Gap Inc. and Victoria’s Secret came into the fourth quarter with heavy inventory loads. The concern now is the retail industry’s weak showing over Thanksgiving weekend will force them to take bigger markdowns that could hurt their fourth-quarter profits.

Simeon Siegel, an analyst with Nomura Equity Research, looked at the inventory carried by those and other specialty-apparel retailers at the end of the third quarter and compared it with his projections for the chains’ fourth quarter sales. He found that in most cases inventory growth far outpaced sales growth. Normally, the two should be growing about the same.

“The ratios are the worst we have seen in quite a while,” Mr. Siegel said.

The companies each acknowledged that their inventories were rising and said the levels were appropriate.

Yet with holiday sales getting off to a slow start, positions that seemed appropriate several weeks ago may turn out to be too high. A survey commissioned by the National Retail Federation concluded that sales over Thanksgiving weekend fell to $57.4 billion from $59.1 billion a year ago—the first drop in at least seven years.

Fewer shoppers said they had bought clothing or visited apparel stores, according to the NRF survey, which polled nearly 4,500 consumers.

Marshal Cohen, the chief industry analyst for the NPD Group, said he spotted signs throughout the weekend that stores were overstocked, including goods stacked high up on shelves and ample merchandise in storerooms. (…)

Thanksgiving sales were generally weak, as were back-to-school sales. If Christmas sales are also weak, the inventory overhang will carry into Q1’14.

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HOUSING IS ALSO WEAK:

The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The 4-week average of the purchase index is now down about 8% from a year ago. (CalculatedRisk)


Ghost  Romain Hatchuel: The Coming Global Wealth Tax

(…) households from the United States to Europe and Japan may soon face fiscal shocks worse than any market crash. The White House and New York Mayor-elect Bill de Blasio aren’t the only ones calling for higher taxes (especially on the wealthy), as voices from the International Monetary Fund to billionaire investor Bill Gross increasingly make the case too. (…)

As for the IMF, its latest Fiscal Monitor report argues that taxing the wealthy offers “significant revenue potential at relatively low efficiency costs.” (…)

From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.

Could there now be a wealth tax anticipation effect that would incite the wealthiest to save right when they are about the only source of demand?

Trade Gap in U.S. Shrank in October on Record Exports

Exports climbed 1.8 percent to $192.7 billion on growing sales of food, petroleum products, drilling equipment and consumer goods, including jewelry.

Imports increased 0.4 percent to $233.3 billion in October, the most since March 2012. Gains in consumer goods such as toys and artwork, and fuel helped offset a slump in purchases of foreign automobiles.

Sales of goods to China, Canada and Mexico were the highest ever, pointing to improving global demand that will benefit American manufacturers. In addition, an expanding U.S. economy is helping boost growth abroad as purchases of products from the European Union also climbed to a record in October even as fiscal gridlock prompted a partial federal shutdown.

Hmmm…

Lightning  EUROZONE RETAIL TRADE TURNS WEAKER, AGAIN

Core sales volume cratered 0.8% in October after declining 0.1% in September. German sales volume dropped 1.0% on the past 2 months. 

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European Stocks Suffer a Setback

European stocks fell sharply across the board today.  In Germany and France, markets have been very quiet over the last few months, steadily moving higher in small clips on a daily basis.  That came to an end today with big moves lower in both countries.  Germany is still well above its 50-day moving average and its uptrend remains intact, but the same can no longer be said for France.  As shown in the second chart below, the French CAC-40 broke hard through its 50-day today, which also represented the bottom of its multi-month uptrend channel.

Along with France, the UK (FTSE 100) and Italy (FTSE MIB) also saw significant breaks below their 50-days today.  For Italy’s major index, the 50-day had acted as key support going back to August, but that’s no longer the case after the wash out we saw today.

The fall in Europe sent US stocks lower this morning, and it was the stocks with heavy exposure to Europe that got hit the hardest.  Keep an eye on this trend in the days ahead.  

BANKING

Wall Street Sweats Out Volcker Rule With 18% of Revenue in Play

(…) The $44 billion at stake represents principal trading revenue at the five largest Wall Street firms in the 12 months ended Sept. 30, led by New York-based JPMorgan, the biggest U.S. lender, with $11.4 billion. An additional $14 billion of the banks’ investment revenue could be reduced by the rule’s limits on stakes in hedge funds and private-equity deals. Collectively, the sum represents 18 percent of the companies’ revenue.

Goldman Sachs and Morgan Stanley may be the most affected by any additional restrictions since they generate about 30 percent of their revenue from principal trading. JPMorgan generated about 12 percent of its total revenue from principal transactions in the 12 months ended Sept. 30. The figure was less than 10 percent for Bank of America, based in Charlotte, North Carolina, and New York-based Citigroup Inc.

OIL
 
Iran threatens to trigger oil price war
Tehran warns Opec it will increase output even if prices tumble

(…) Speaking to Iranian journalists in Farsi minutes before ministers went into a closed-door meeting, Bijan Zangeneh, Iran’s oil minister, said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.” (…)

Iraq, meanwhile, has also said it plans to increase production by 1m b/d next year to 4mb/d.

Detroit’s bankruptcy: pensions beware

(…) The news is a ruling by federal bankruptcy judge Steven Rhodes that, contrary to the arguments of public workers’ unions, pensions can be cut in the restructuring. Detroit is the largest city ever to go bust, so its bankruptcy will be widely watched regardless, but its treatment of pensions and other matters could set important precedents. (…)

Cities and unions around the US have received a wake-up call: they need to address unfunded pension obligations now, or face the ugly possibility of deep cuts later. Muni bond investors also face a new reality. The rules of the game may change and, if they do, the prices of general obligation munis will too.

Here’s the WSJ’s take on this: Detroit’s Bankruptcy Breakthrough

(…) More significant for the future of America’s cities, Judge Rhodes also dismissed the union conceit that the language of Michigan’s constitution protects public pensions as “contractual obligations” that cannot be “diminished or impaired.” The express purpose of bankruptcy is to impair contracts, and Judge Rhodes emphasized that pension benefits are “not entitled to any heightened protection in bankruptcy.”

If pension benefits are immune from bankruptcy, then unions would have even less incentive than they do now to consider the economic condition of a city when they press politicians for more benefits. They could drive cities toward bankruptcy knowing that bondholders would have to absorb nearly all the burden of restructuring. Cities would also have no recourse other than to raise taxes or cut more current services, neither of which helps urban renewal. (…)

Judge Rhodes’s wise ruling is a warning to unions and their political bodyguards that Chapter 9 is not a pension safe harbor. American public finance will be better as a result.

 
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