NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

The government’s main gauge of retail sales, encompassing spending on everything from cars to drinks at bars, rose a healthy 0.4% from September, despite the partial government shutdown that sent consumer confidence tumbling early in the month. Sales climbed in most categories, with gains in big-ticket items as well as daily purchases such as groceries. (…)

Wednesday’s report showed some clear pockets of strength: Sales of cars rose at the fastest pace since the early summer. Sales in electronics and appliance stores also rose robustly. Stores selling sporting goods, books, and music items saw business grow at the fastest pace in more than a year.


High five Let’s not get carried away. Car sales have been slowing sequentially lately and are near their past cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis) (next 2 charts from CalculatedRisk):



Meanwhile, core sales ex-cars remain on the weak side as this Doug Short chart shows:


Consumer Prices Ease Amid Lower Fuel Costs

The consumer-price index rose only 1% in October from the same month last year, the smallest 12-month increase since October 2009, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, rose 1.7% from a year ago, similar to the modest gains seen in recent months. The Fed targets an annual inflation rate of 2%.

Prices fell 0.1% last month from September, the first drop since April. Core prices increased 0.1%.

Last month, the overall decrease reflected gasoline prices, which were down 2.9% for the month. (Chart from Haver Analytics)

High five Let’s not get carried away. Core inflation remains surprisingly resilient given the weakness of the economy and the large output gap. On a YoY basis, core CPI is stuck within 1.6% and 1.8% and the Cleveland Fed median CPI just won’t slip below 2.0%. Looking at monthly trends, core CPI has slowed to 0.1% over the last 3 months from 0.2% in the previous 3 months. Yet, the median CPI only slowed to 0.1% MoM last month after a long string of 0.2% monthly gains. The inflation jury is still out.


Pointing up No Renaissance for U.S. Factory Workers as Pay Stagnates

(…) The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.

Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jersey lost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics. (…)

Some of the states where factory jobs are growing the fastest are among the least unionized. In 2012, 4.6 percent of South Carolina workers were represented by unions, as did 6.8 percent of Texans, according to the U.S. Bureau of Labor Statistics. New York, the most-unionized, was at 24.9 percent.

Assembly workers at Boeing’s nonunion plant in North Charleston, South Carolina, earn an average of $17 an hour, compared with $27.65 for the more-experienced Machinists-represented workforce at the company’s wide-body jet plant in Everett, Washington, said Bryan Corliss, a union spokesman. (…)

In Michigan, which leads the U.S. with 119,200 factory jobs added since June 2009, automakers are paying lower wage rates to new hires under the United Auto Workers’ 2007 contracts. New UAW workers were originally paidas little as $14.78 when the contract was ratified in 2011, which is about half the $28 an hour for legacy workers. Wages for some of those lower-paid employees have since risen to about $19 an hour and the legacy rate hasn’t increased. (…)

General Electric Co. says it has added about 2,500 production jobs since 2010 at its home-appliance plant in Louisville, Kentucky. Under an accord with the union local, new hires make $14 an hour assembling refrigerators and washing machines, compared with a starting wage of about $22 for those who began before 2005. While CEO Jeffrey Immelt has said GE could have sent work on new products to China, it instead invested $1 billion in its appliance business in the U.S. after the agreement was reached.

The company is also moving work to lower-wage states. In Fort Edward, New York, GE plans to dismiss about 175 employees earning an average of $29.03 an hour and shift production of electrical capacitors to Clearwater, Florida. Workers there can earn about $12 an hour, according to the United Electrical, Radio and Machine Workers of America, which represents the New York employees. (…)

Existing Home Sales Fall 3.2%

Sales of previously owned homes slipped for the second consecutive month in October, the latest sign that increased interest rates are cooling the housing recovery.

Existing-home sales declined 3.2% in October to a seasonally adjusted annual rate of 5.12 million, the National Association of Realtors said Wednesday. The results marked the slowest sales pace since June.

The federal government shutdown last month pushed some transactions into November, Realtors economist Lawrence Yun said. The Realtors group reported that 13% of closings in October were delayed either because buyers couldn’t obtain a government-backed loan or the Internal Revenue Service couldn’t verify income.

The number of homes for sale declined 1.8% from a month earlier to 2.13 million at the end of October. The inventory level represents a five-month supply at the current sales pace. Economists consider a six-month supply a healthy level.

Americans Recover Home Equity at Record Pace

The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose, a sign supply shortages may ease as more owners are able to sell.

The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter, according to a report today from Seattle-based Zillow Inc. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place. (…)

Fingers crossed“The pent-up demand from people who now have enough equity to sell their homes will help next year,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “We’ll see the effect during the spring selling season. Not a lot of people put their homes on the market during the holidays.” (…)

About 10.8 million homeowners were underwater on their mortgages in the third quarter, down from 12.2 million in the second quarter, Zillow said. About 20 million people had negative equity or less than 20 percent equity, down from 21.5 million in the prior three months. Las Vegas, Atlanta, and Orlando, Florida, led major metropolitan areas with the highest rates of borrowers with less than 20 percent equity. (…)


Fed Casts About for Bond-Buy Endgame

Federal Reserve officials, mindful of a still-fragile economy, are laboring to devise a strategy to avoid another round of market turmoil when they pull back on one of their signature easy-money programs.

Minutes of the Oct. 29-30 policy meeting, released Wednesday, showed officials continued to look toward ending the bond-buying program “in coming months.” But they spent hours game-planning how to handle unexpected developments and tailoring a message to the public to soften the impact of the program’s end. (…)

Fed officials are hoping their policies will play out like this: The economy will improve enough in the months ahead to justify pulling back on the program, which has been in place since last year and has boosted the central bank’s bondholdings to more than $3.5 trillion. After the program ends, they will continue to hold short-term interest rates near zero as the unemployment rate—which was 7.3% last month—slowly declines over the next few years. (…)

One scenario getting increased attention at the Fed: What if the job market doesn’t improve according to plan and the bond program becomes ineffective for addressing the economy’s woes? The minutes showed their solution might be to replace the program with some other form of monetary stimulus. That could include a stronger commitment to keep short-term interest rates low far into the future, a communications strategy known as “forward guidance.”

Top Fed officials have been signaling in recent weeks that their emphasis is shifting away from the controversial bond-buying program and toward these verbal commitments to keep rates down. (…)

Punch The reality is that, do what you want, say what you want, market rates are market rates.

Millennials Wary of Borrowing, Struggling With Debt Management

Young people are becoming warier of borrowing — but they’re also getting worse at paying bills.

(…) Total debt among young adults actually dropped in the last decade to the lowest level in 15 years, separate government data show, with fewer young adults carrying credit-card balances and one in five not having any debt at all.

And yet, Millennials appear to be running into more trouble when paying their bills — whether on credit cards, auto loans, or student loans.

Millennial borrowers are late on debt payments roughly as much as older Gen-X borrowers, Experian’s data show. Millennials also use a high share of their potential borrowing capacity on cards, just like Gen-Xers, meaning they’re as likely to max out on cards.

Since Millennials tend to have fewer assets than Gen-Xers and other generations, as well as shorter credit histories, they end up with the worst average credit score — 628 — of any demographic group.

Pointing upMillennials have “the worst credit habits,” and are “struggling the most with debt management,” Experian said in a report.

(…) A study by the Federal Reserve Bank of New York recently suggested high student-loan balances may have encouraged young adults to reduce their credit-card balances between 2005 and 2012.

Other young adults may be less willing to take risksin a weak economy, whether by splurging on furniture for a new apartment, moving geographically or starting businesses — things that often require debt.

What Experian’s data suggest is that the Millennials who are in fact borrowing are struggling to do so responsibly, at least partly because of the nation’s 7.3% jobless rate, sub-3% growth and $1 trillion student-loan tab — all things that are weighing disproportionately on young people, especially those without college degrees.

As the Journal reported last week, the share of student-loan balances that were 90 or more days overdue in the third quarter rose to 11.8% from 10.9%, even as late payments on other debts dropped. While the incidence of late payments on Millennials’ overall debts isn’t alarming yet, it’s big enough to drag down their credit scores, Experian said. (…)

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

In December 2010, I wrote INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!, warning people not to give much weight to bullish sentiment readings:

I have analyzed 30 years of data plotting the II bull-bear % difference against the DJ Total Stock Market Index of 5000 US stocks. Extreme readings are above +/-25%. However, I have easily identified 11 periods when the “contrary” indicator rose to cross the extreme +30% level which were followed by strongly rising markets. Obviously not useful on that side of the ledger. (…)

Overall, never mind the extreme positives, they are essentially useless. The extreme negatives (bullish) are few but generally very good although some require patience and staying power.

My analysis was based on relative bullishness, bulls minus bears like in the chart below, but Barclays here takes another angle looking at the absolute level of bears:

According to the US Investors’ Intelligence Survey there are currently 40% more bulls than bears. At the end of August, the same survey indicated just 13.4% more bulls that bears. Global equities have rallied by 9% since then. Other measures also confirm this bullish hue, but none have displayed anything close to the relationship that the Investors’ Intelligence Survey has had recently with forward returns.


Here’s the more interesting part:

Closer examination reveals that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.



CLSA’s Andy Rothman is one of the most astute analyst living in China:

China’s leaders have issued strong statements in support of private enterprise and the rights of migrant workers and farmers which, if implemented effectively, will facilitate continued economic growth and social stability.  By announcing relaxation of the one-child policy and the abolishment of ‘re-education through labor’, the Party acknowledged it needs to curb human rights abuses and re-establish trust.  The creation of new groups to coordinate economic and national security policy signal that Xi Jinping has quickly consolidated his power as Party chief, raising the odds that the decisions announced Friday will be implemented quickly.

The brief, initial communique issued when the Party Plenum closed last Tuesday was dense, obtuse and packed with outdated political slogans.  But the more detailed ‘decision document’ published Friday was, for a Communist Party report, unusually clear, particularly in its support for private enterprise and markets.

Strong support for entrepreneurs

The most important signal from the Party leadership was strong support for the private sector and markets. Private firms already account for 80% of urban employment and 90% of new job creation, as well as two-thirds of investment in China, so improving the operating environment for entrepreneurs is key to our relatively positive outlook for the country’s economic future.  Friday’s document did not disappoint in this respect.

Although the Party still cannot rise to the challenge of actually using the Chinese characters for ‘private’ sector’, continuing to refer to it as ‘non-public’, they did pledge to ‘unwaveringly encourage, support and guide the development of the non-public economy’, and declared that ‘property rights in the non-public economy may equally [with the state sector] not be violated.’

In Friday’s document, the Party said it would ‘reduce central government management over micro-level matters to the broadest extent’, called for an end to ‘excessive government intervention’, and said that ‘resource allocation [should be] based on market principles, market prices and market competition.’  The world’s largest Communist Party declared that ‘property rights are the core of ownership systems’, and called for ‘fair competition, free consumer choice, autonomous consumption, [and] free circulation of products and production factors.’  The document also says China will ‘accelerate pricing reform of natural resources’ to ‘completely reflect market supply and demand’, as well as the costs of environmental damage.

The Party also pledged to reduce red tape and administrative hurdles to doing business.  Zhang Mao, the head of the State Administration for Industry and Commerce, explained that ‘registering a business will become much more convenient in the near future.’  And Miao Wei, minister for industry and information technology, announced that implementation of the plenum decision would lead his agency to eliminate at least 30% of administrative approval procedures by the end of 2015.

Friday’s document called for better protection of intellectual property rights, as well as the ‘lawful rights and interests of investors, especially small and mid-sized investors.’  The Party said it would create a ‘marketized withdrawal system where the fittest survive’, and a better bankruptcy process.

Party leaders did say that public ownership would remain ‘dominant’, but they clearly didn’t mean it.  Repeating this language, especially in light of the fact that private firms are already dominant, is, in our view, just a rhetorical bone thrown to officials whose political or financial fortunes are tied to state-owned enterprises. (…)


The Party did, however, raise the share of SOE income that has to be paid into the national security fund to 30% by 2020, up from 10-20% now.

In what may be a warning that serious SOE reform is likely down the road, the Party did call for the elimination of ‘all sorts of sector monopolies, and an end to ‘preferential policies . . . local protection . . . monopolies and unfair competition.’

Hukou reform coming

If the most important message from the plenum is renewed support for the private sector, a close second is the decision to reform the hukou, or household registration system.  This is important because there are more than 230m urban residents without an urban hukou, accounting for one-third of the entire urban population.

According to the official news agency, Xinhua, ‘Friday’s document promised to gradually allow eligible rural migrants to become official city residents, accelerate reform in the hukou system to fully remove restrictions in towns and small cities, gradually ease restriction in mid-sized cities, setting reasonable conditions for settling in big cities while strictly controlling the population in megacities.’ (…)

Hukou reform will be expensive, but the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services.  In cases where local governments cannot afford these services, the central government will transfer the necessary funds.  Hukou reform will be rolled out gradually, and in our view:

Will reduce the risk of social instability from the 234m people living in cities who face de jure discrimination on a daily basis, particularly in eligibility for social services.

May increase the supply of migrant workers in cities at a time when the overall labour force is shrinking.

Should improve consumption by strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.

Should result in higher productivity in manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. (…)

The one-child policy will be relaxed by ‘implementation of a policy where it is permitted to have two children if either a husband or a wife is an only child,’ a change from the current rules which require both the husband and wife to be only-children in order to qualify to have a second child.

Wang Peian, the deputy director of the national health and family planning committee, said that the Party will allow each province to decide when to switch to the new policy, but Friday’s announcement, in our view, spells the rapid end of the one-child policy.

Wang Feng, one of China’s leading demographers, told us over the weekend that Friday’s announcement was a ‘decisive turning point.’  But he also reminded us that in a May CLSA U report, he explained why ending the one-child policy is likely to result in a temporary uptick in the number of births, but is unlikely to change the longer-term trend towards a lower fertility rate.  The current fertility rate of 1.5 could drop even lower in the future, closer to Japan and South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. (…)

Xi consolidates power

The plenum decided to create two new groups within the government, a National Security Council and the Leading Small Group for the Comprehensive Deepening of Reform.  This signals that Party chief Xi Jinping has quickly and effectively consolidated his political power, far beyond, apparently, what his predecessor Hu Jintao was able to achieve.  This bodes well for Xi’s ability to implement the reform decisions announced Friday. (…)


NEW$ & VIEW$ (6 NOVEMBER 2013)

Freight Shipments Down in October

October was a depressed month for freight and the economy in general. The number of shipments and freight expenditures both declined from September, by 3.5 and 2.6 percent respectively. This marks only the second time this year that both indexes declined in the same month. (Shipment volume in April dropped 3.5 percent, but expenditures fell only 1.6 percent.) The 16-day federal government shutdown is partly to blame for the declines, but prior to the shutdown the economy was already exhibiting signs of a cool down.


The 3.5 percent decline in freight volumes followed two months of strong growth, but is reflective of the weakening state of the overall economy. Shipment volume has already been below corresponding 2012 volumes in six months of this year, and October contributed the seventh month, coming in 2.0 percent below a year ago.

The sharp reduction in the shipment volume in October can be linked to the government shutdown. Although Customs and Homeland Security workers were exempt from the furlough, many freight shipments were delayed because other government agencies were not open to perform necessary inspections or processing.

Railroad carloadings declined again in October, dropping 0.7 percent, while intermodal loadings reversed September’s drop and rose 2.5 percent. Truck tonnage rose in September (the month for which the latest data is available from the American Trucking Association), but spot market load indicators have declined sharply in October.

U.S. manufacturing output was almost flat in September, with even the automotive sector showing definite signs of slowing. With inventories growing and retail sales and business spending flagging, there has been little reason to restock. In addition, export demand began to stall in August and has just begun to rebound.

U.S. planned layoffs rise in October: Challenger

The number of planned layoffs at U.S. firms rose 13.5 percent in October on cuts in the pharmaceutical and financial sectors, a report on Wednesday showed.

Employers announced 45,730 layoffs last month, up from 40,289 in September, according to the report from consultants Challenger, Gray & Christmas, Inc.

But for the first time in five months, the October figure was lower than the year-ago tally, which came in at 47,724. For 2013 so far, employers have announced 433,114 cuts, close to the 433,725 seen in the first ten months of last year.

MBA: Mortgage Applications decrease 7% in Latest Weekly Survey

The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier and is at its lowest level since the end of December 2012. …



Euro zone Sept retail sales fall more than expected

The volume of retail trade fell 0.6 percent on the month after a revised 0.5 percent rise in August, the EU’s statistics office Eurostat said. Analysts polled by Reuters expected only a 0.4 percent decline.

Sales of both food and non-food products fell and the volume of sales of automotive fuels was flat on the month.

Compared with the same period last year, September retail sales were up 0.3 percent, following three straight months of declines, the data showed.

The decline in retail sales was especially significant in the southern Europe, with Portugal recording an all-time low with a 6.2 percent slump on the month and Spain’s 2.5 percent decline was the biggest since April 2012.

Slovenia, now at risk of needing international financial assistance in case it fails to fix its banks and reform the economy, saw a 4.0 percent fall month-on-month in sales in September, the biggest decline since February 2009.

Core sales declined only 0.1% following two consecutive months of +0.4% growth. However, German retail sales are pretty weak, down 0.4% in September down 1.1% during the past four months (-3.4% annualized).



High five  As a reminder, as posted here on October 31:

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.

German Factory Orders Beat Estimate as Euro-Area Recovers

Orders, adjusted for seasonal swings and inflation, jumped 3.3 percent from August, when they fell 0.3 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 0.5 percent, according to the median of 37 estimates in a Bloomberg News survey. Orders advanced 7.9 percent from a year ago, when adjusted for the number of working days.

Overseas orders climbed 6.8 percent in September, while those from within the country dropped 1 percent, today’s report showed. Demand from the euro area surged 9.7 percent as investment goods jumped 23.6 percent. Over a two-month period, international demand contracted while domestic orders rose, led by investment goods.

“Foreign demand continues to remain rather weak despite the September increase,” the ministry said in the statement. “The data confirm the picture of an increasingly domestically driven economic recovery.”

This latest comment was aimed at the U.S. Treasury…In any case, this has been a very volatile series, with negative numbers in 4 of the last 6 months, although orders did rise 2.7% during the whole period, assuming the latest +3.3% jumped doesn’t get revised.


Disappointing start to NY auction season
Quarter of paintings are unsold

One-quarter of the high-profile Impressionist and Modern paintings under the hammer at Christie’s went unsold on Tuesday night, signalling a bleak start for the autumn auction season in New York.

Another disappointment was “Mann und Frau (Umarmung)” by Schiele, which did not receive a single bid. The anonymous seller of this piece was widely rumoured to be beleaguered hedge fund billionaire Steve Cohen. Crying face

Earlier this week Mr Cohen’s fund, SAC Capital Advisors, said it would plead guilty to insider trading violations and pay a record $1.2bn fine. Observers at the evening said the combination of sky-high valuations and mixed quality had weighed more heavily on the purchasing decisions of dealers and collectors than in previous stellar years.



China Drags on Western Profits

Once fuel for Western profits, China has emerged as a weak spot, offsetting optimism that European markets may be turning the corner and promising continued sluggish sales growth.

(…) But the latest set of quarterly earnings results reveal that for many companies, China has been a drag. While some industries did well, the combination of slower economic growth, plus government crackdowns that have put fresh scrutiny on the way companies win new business, hurt sectors from technology to luxury goods to pharmaceuticals. As a result, the sluggish global sales that persisted through much of the recovery aren’t likely to pick up soon. (…)


Analysts estimate that third-quarter revenue at companies in the S&P 500 index increased just 3.2%, according to Thomson Reuters, following several periods of flat or no growth. Profits are expected to fare better, rising 5.3%, as companies cut costs and buy back stock, which boosts earnings per share.

The picture in Europe is bleaker. Earnings for companies in the Stoxx Europe 600 are expected to decline 14.6% as revenue falls 1.9%. While many European companies have reported improved performance at home, the euro-zone recovery remains shallow. Emerging markets are a particular weak spot, in part because many currencies have weakened against the euro.


NEW$ & VIEW$ (25 OCTOBER 2013)

Half way into earnings season…(see below)

Mortgage Declines Spread the Pain 

Bank of America, Other Lenders Cut Thousands of Jobs as Refinancing Slows and Bad Loans Shrink

Bank of America Corp. cut about 1,200 mortgage jobs on Thursday, and is aiming to shed another 2,800 such jobs in the fourth quarter, according to people familiar with the matter. The layoffs follow similar moves at Wells Fargo & Co., which cut about 6,200 jobs in its mortgage unit, and Citigroup Inc., which has trimmed about 1,100 jobs. (…)

“As we continue to resolve the needs of customers with delinquent loans, we are reducing the size of the operations that support these specialized programs,” a Bank of America spokesman said. “Additionally, in line with the industry, we are realigning our cost structure in response to lower customer demand for mortgage refinancing.”

Since the last quarter of 2012, the legacy asset-servicing group has seen its staff drop 45% to 32,000, said Ron Sturzenegger, the BofA executive who runs the group. The reduction includes attrition, which is at about 18% to 20%, he said. (…)

Swedish Manufacturers Cut Jobs Appliance manufacturer Electrolux and truck maker Volvo each plan to trim about 2,000, amid continued uneasiness about how quickly European demand will return for a range of big-ticket items.

The companies—with a combined 176,000 workers world-wide—posted lower net profit in the third quarter than the same period a year ago.

The moves in Sweden come as part of a continued wave of retrenchments by major European firms. High costs, weak European markets and the need for organizational restructuring are fueling these actions. (…)

Electrolux said its European operations, especially in Southern Europe, weighed on volumes and earnings in the third quarter. It expects market demand for appliances in Europe to decline by 1% to 2% for the full year of 2013. Electrolux is raising its estimates for market demand in the U.S. to increase by 7% to 9% for the full year of 2013. (…)

The world’s third-largest truck maker by trucks sold said it expects the size of the European heavy-duty truck market to remain unchanged in 2014, as it reported lower third-quarter sales and earnings than expected.

The European truck market has struggled to regain its footing after the 2007 financial crisis led to a nose dive in truck orders. “For a third year in a row we are calling this a flat market,” Volvo’s Chief Executive Olof Persson said in a news conference Friday.

Volvo’s orders in Europe were up 11% in the third quarter from the year-ago period. However, demand was boosted by customers taking the chance to buy trucks with less expensive so-called Euro 5 engines, ahead of the introduction of new emission standards, Euro 6, at year-end. There is concern that weak underlying demand will become evident next year when the pre-buy effect is gone. (…)

Rising Euro Jeopardizes Bloc’s Economy

The rising euro threatens to cool exports and the economy further after business activity in the euro zone already slowed in October.

(…) “The euro is too expensive, too strong and a bit too German,” French Industry Minister Arnaud Montebourg told the French daily Le Parisien this week, as he urged the ECB to take action.

Indeed, pain from the euro’s gains is likely to expose Europe’s North-South divide, hurting companies in Southern Europe with less room to raise prices and cut costs than Germany’s export powerhouses, which tend to sell more premium goods, such as luxury cars and niche engineering products. (…)

From FT Alphaville:

Consider this from Morgan Stanley’s FX team:

EMU-based banks are preparing for the Asset Quality Review, which will reference year-end balance sheets. Ahead of the event, equity weak banks have a high incentive to reduce the asset side of the balance sheet, using proceeds to add to equity positions. Foreign funds stand ready to snap up these assets at discounted prices. In addition, EMU banks’ net foreign asset position has gone up sharply. Exhibit 2 suggests that banks run a EUR600bln foreign assets position not covered by foreign-denominated liabilities, but by EUR-denominated ones. In other words, EMU banks run a EUR600bln EUR foreign-currency long position. Ahead of the AQR banks are likely to reduce this exposure markedly, suggesting the EUR could benefit from repatriation pressure.

Now weigh that against the fact that “EMU’s leading indicators have started rolling over, the French industry minister Montebourg has complained about EUR strength… ECB officials have brought back the idea of cutting the deposit rate thus imposing negative rates” (again), And as Citi point out, the measure of relative economic surprises out of the eurozone and the US headed south in August/September and decoupled from the surging currency pair…

… and do what thou wilt.

Oh! and this rising problem:


Storm cloud  Emerging-Market Bank Lending Conditions Tighten Further

Bank lending conditions in emerging markets have deteriorated to their worst levels in over a year, according to a new industry survey. (…)

Lending conditions in Asian economies are showing the worst degradation, with wholesale funding conditions rapidly decaying, credit standards tightening sharply and demand for loans falling and non-performing loans rising, according to the Institute of International Finance’s quarterly survey. (…)

“This tightening reflects in part banks’ reaction to the capital market volatility over the summer months,” the global banking trade group. (…)

It’s not just Asia. The amount of nonperforming loans are rising across the globe, from Latin America to Africa, the Middle East to Europe. “Bank asset quality continues to deteriorate,” the IIF said.

  • Demand for loans is falling fastest in Latin America, underscoring concerns there about falling investment levels.

Fingers crossed  Putting Fed Taper On Ice Heats Up Emerging Mkts

Now that the Fed taper is indefinitely off, the emerging markets trade is back on. Since its mid-summer lows, the MSCI Emerging markets index has rallied 18%, almost fully clawing back losses sustained over the first six months of the year.

(…) Will the easy money flowing back into emerging markets reignite the credit boom? Or will governments aim to repeat what the Asian economies did after the Asian crisis of the late 1990s and implement policies focused on building exports and foreign currency reserves?

Some hints:


From Bespoke Investment which tallies all NYSE companies:

Just over 600 companies have reported earnings this season, and the average stock that has reported has gained 0.19% on the day of its report.

Zacks Research sees an improving trend in the more recent results:

Total earnings for the 212 (47%) S&P 500 companies that have reported results already, as of Thursday morning October 24th, are up +8.1% from the same period last year, with 67.9% beating earnings expectations with a median surprise of +2.5%. Total revenues for these companies are up +3%, with 42% beating revenue expectations with a median surprise that is barely in the positive.

Unlike Q2, the Finance sector has been less of a growth driver in Q3, with total earnings for the 60.1% of the sector’s total market capitalization that have reported already, up +13.0%. Excluding Finance, total earnings for the S&P 500 that have been reported would be up +6.4% vs. +1.2% for the same companies in Q2.

The charts below show how the results from these 212 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates which looked materially weaker in the earlier phase of the Q3 reporting cycle have improved.

The earnings beat ratio looks more normal now than was the case last Friday when only 62.6% of the 99 companies that had reported by then were beating expectations. It didn’t make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.

The current above average earnings beat ratio for the 212 S&P 500 companies that have reported already confirms what many of us were suspecting all along – that estimates had fallen enough to make it easy for companies to come ahead of them. We see this quarter after quarter, with about two-thirds of the companies beating earnings expectations – a good illustration of management teams’ tendency to under-promise and over-deliver.

The composite earnings growth rate for Q3, combining the results from the 212 that have come out with the 288 still to come, currently remains at +2.9% on +1.2 higher revenues. It is perhaps reasonable to expect that the final Q3 earnings growth tally will likely be not much different from the +3.4% achieved in Q2.

We may not have had much growth in recent quarters, but the expectation is for strong growth resumption in Q4 and beyond. Estimates for Q4 have started coming down, with the current +9.1% growth pace down from last week’s +9.5%. But as the chart below shows, consensus estimates for Q4 and beyond represent a material acceleration in earnings growth.


Guidance has been overwhelmingly negative over the last few quarters and is not much different thus far in Q3 either, a few notable exceptions aside. (…) Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. (…)

RBC Capital’s tally includes yesterday’s results (228 companies or 51% of the Index): 63% beat earnings (61% yesterday), 30% beat revenues (28% yesterday). RBC’s blended Q3 earnings are now seen up 4.6% on 2.0% revenue growth (Zacks sees +2.9% EPS on +1.2% revenues).

If we get 4.6% YoY growth in Q3 EPS, this would mean $25.10 on S&P’s scorecard, well short of the $26.72 currently expected. That said, aggregators each have their own calculation methods.

BloombergBriefs monitors conference calls to “measure” the corporate mood:

The economy has registered no meaningful improvement in conditions; weakness was again the prevailing theme in the latest round of conference calls. A “challenging” environment was mentioned by the majority of companies, particularly those servicing the household sector — restaurants, retail, food, household products. Many noted the state of affairs in the nation’s capital also seemed to be holding back the recovery process.

The Bloomberg Orange Book Sentiment Index for the week ended Oct. 25 was 46.67, a decline from the 48.03 registered during the previous week. It is the 37th consecutive weekly reading below 50, and the lowest reading since December 2012. Sub-50 readings suggest contractionary conditions, while above-50 is indicative of expansion.

Bespoke monitors guidance: Guidance Remains Weak

So far this earnings season, 62.6% of the companies that have reported have beaten earnings estimates.  As shown below, this quarter’s reading is at the moment the highest seen since Q4 2010, but given that there are still more than 1,000 companies left to report, this is far from set in stone. Pointing up  Historically, the earnings beat rate has drifted lower as the reporting period progresses, so our guess would be that it finishes somewhere around the 60% mark.

While the earnings beat rate has been pretty strong, guidance has been weak, which is nothing new to this market.  At the moment, the spread between the percentage of companies raising guidance minus the percentage lowering guidance stands at -5.3 percentage points.  As shown below, if the guidance spread remains in negative territory through the end of earnings season, it will be the ninth consecutive quarter where more companies have lowered guidance than raised guidance.  It has been a long while now since corporate America collectively had a rosy view of the future.


Alan GreenspanAlan Greenspan
‘I couldn’t tell what was really happening’

(…) But tact cannot entirely mask Greenspan’s deep concern that six years after the leverage-fuelled crisis, there is even more debt in the global financial system and even easier money due to quantitative easing. And later he admits that the Fed faces a “brutal” challenge in finding a smooth exit path. “I have preferences for rates which are significantly above where they are,” he observes, admitting that he would “hardly” be tempted to buy long-term bonds at their current rates. “I run my own portfolio and I am not long [ie holding] 30-year bonds.”

But even if Greenspan is wary of criticising quantitative easing, he is more articulate about banking. Most notably, he is increasingly alarmed about the monstrous size of the debt-fuelled western money machine. “There is a very tricky problem we don’t know how to solve or even talk about, which is an inexorable rise in the ratio of finance and financial insurance as a ratio of gross domestic income,” he says. “In the 1940s it was 2 per cent of GDP – now it is up to 8 per cent. But it is a phenomenon not indigenous to the US – it is everywhere. (…)

What also worries Greenspan is that this swelling size has gone hand in hand with rising complexity – and opacity. He now admits that even (or especially) when he was Fed chairman, he struggled to track the development of complex instruments during the credit bubble. “I am not a neophyte – I have been trading derivatives and things and I am a fairly good mathematician,” he observes. “But when I was sitting there at the Fed, I would say, ‘Does anyone know what is going on?’ And the answer was, ‘Only in part’. I would ask someone about synthetic derivatives, say, and I would get detailed analysis. But I couldn’t tell what was really happening.”

This last admission will undoubtedly infuriate critics. Back in 2005 and 2006, Greenspan never acknowledged this uncertainty. On the contrary, he kept insisting that financial innovation was beneficial and fought efforts by other regulators to rein in the more creative credit products emerging from Wall Street. Even today he remains wary of government control; he does not want to impose excessive controls on derivatives, for example.

But what has changed is that he now believes banks should be forced to hold much thicker capital cushions. More surprising, he has come to the conclusion that banks need to be smaller. “I am not in favour of breaking up the banks but if we now have such trouble liquidating them I would very reluctantly say we would be better off breaking up the banks.” He also thinks that finance as a whole needs to be cut down in size. “Is it essential that the division of labour [in our economy] requires an ever increasing amount of financial insight? We need to make sure that the services that non-financial services buy are not just ersatz or waste,” he observes with a wry chuckle. (…)


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$ (10 OCTOBER 2013)

U.S. Mortgage Applications Show Little Bounce

The Mortgage Bankers Association reported that the total mortgage market index improved by 1.3% (-54.7% y/y) last week following their slight down-tick during the prior week. Applications to refinance an existing loan led the gain with a 2.5% increase, but remained down by two-thirds versus last year. Homepurchase mortgage applications slipped 0.7% (-5.6% y/y) and were 14.7% below the early-May peak.

large image

German industrial production growth adds to signs of third quarter economic expansion

Looking at the three months to August, which avoids some of the volatility in the monthly data, industrial production increased 1.4% on the previous three month period, with manufacturing up 0.9% and
construction posting a healthy gain of 3.8% over the same period. While the gains in total industrial production and manufacturing output fell slightly short of the 1.5% and 1.2% respective increases seen in the
second quarter, the upturn in construction in the three months to August was the largest since May 2011.

The industrial production data follow factory orders numbers, which showed a 0.3% drop in orders in August following a 1.9% decline in July. However, orders were nevertheless still 2.1% higher in the latest three months compared with the prior three months,which is the second- strongest quarterly rate of expansion since early 2011.


  • France’s IP rose 0.2% MoM in August (+0.6% consensus). Manufacturing production +0.3%.
  • Italian IP decreased 0.3% in August following a 1.0% drop.

Lightning Greek Deflationary Pressures Push Nation Further Into Insolvency, Increased Funding Needs

Deflation in Greece is pushing the country further into a state of insolvency.

The embattled nation has slid into deflation. The headline consumer price
index declined 1 percent year over year in September. The core reading fell 2.7 percent year over year in August. The gross domestic product deflator dropped 2.3 percent year over year during the first quarter of 2013. (BloombergBriefs)

Li Sees China Growth Topping 7.5% in First Nine Months

(…) China previously reported expansion of 7.6 percent in the first half and Li’s government introduced measures including faster railway spending and tax cuts to defend a 7.5 percent goal for the full year. The National Bureau of Statistics reports third-quarter growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News for a 7.8 percent pace, up from the second quarter’s 7.5 percent. (…)

IMF fears $2.3tn bond losses from taper
Fund issues warning in global financial situation assessment

(…) If the Federal Reserve’s likely move to start scaling back its asset purchases or fallout from a possible US failure to lift its ceiling on public debt raise long-term interest rates by 1 percentage point, the IMF’s Global Financial Stability Report (GFSR) estimates that the market losses on bond portfolios could reach $2.3tn.

Brazil raises rate for fifth time since April
Central bank move brings Selic rate close to double digits

(…) Brazil’s central bank raised its benchmark interest rate for the fifth time in a row on Wednesday night, bringing it close to double digits and raising questions about how much longer the tightening cycle has left to run.

The bank increased the Selic rate by 50 basis points to 9.5 per cent amid debate about whether it plans to continue the cycle at the next meeting in six weeks’ time, which would bring the rates to the politically sensitive 10 per cent level.

The monetary policy committee “evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year”, it said, repeating the brief statement issued at its last meeting in August.

The bank has been keen to underline the credibility of its inflation-targeting regime after perceptions of political interference earlier in the year.

(…) analysts said use of the same language in the terse statement that accompanies the monetary policy committee meeting decisions indicated that the bank would be likely to tighten by another 50 basis points in November. (…)

Inflation in September of items whose prices are freely determined by the market has been moderating but remained high at 7.4 per cent year on year, while inflation on items controlled by the government was declining and running at an “unsustainably” low 1.1 per cent.

Supply of copper set to outstrip demand Miners and traders expect lower prices

(…) The expectation of a shift into surplus in the copper market was echoed by many of the traders, analysts and hedge fund managers assembled in London for LME Week, the largest annual gathering of the metals and mining industry. For the first time since 2008, investors polled by Macquarie did not pick copper as their favourite metal for next year.

However, few expect a collapse in prices, as a recovering global economy lifts copper demand. “The surplus we are forecasting is very modest,” Mr Keller of Codelco said, predicting a “really marginal” oversupply of 300,000-400,000 tonnes, compared to annual consumption of more than 20m tonnes. (…)


James Y., a reader, asked if I have ever applied the Rule of 20 to other major indices. I don’t have data for other markets. Here’s how Société Générale, which does good work on valuation, looks at many world markets based on the P/BV vs ROE relationships (via Advisor Analyst).

The chart below illustrates a strong and rational link between profitability (as measured by Return on Equity) and valuation (price to book value). The more profitable a market, the higher its valuation. Along with Switzerland, the US equity market generates the highest return on equity and profitability. Both markets have been considered a safe haven over the last few years.

This is a snapshot which provides little historical info. SoGen also shows this interesting chart on U.S. non-financial ROE since 1980 which suggest a cyclical peak is nearby.

Like for the valuation, the gap between the RoE for US financial stocks (9%) and non-financial stocks (17%) is huge. Excluding financials, US RoE is already back to a high level and has stopped rising over the last 2 years.


Chinese Think Tank Puts Shadow Banking at 40% of GDP As the fastest-growing part of China’s financial sector, shadow banking is no longer the sideshow it was five years ago.

(…) The government think tank report put the size of the sector—which covered all shadow-lending activities from most well-known wealth-management products and trusts to interbank business, finance leasing and private lending—at 20.5 trillion yuan ($3.35 trillion) as of the end of 2012.

But the calculation is conservative compared with those done by international research houses. Fitch Ratings estimated earlier this year that China’s total credit including various forms of shadow-banking lending may have reached 198% of the country’s GDP, while J.P. Morgan estimates have put it at as much as 69% of GDP, or 36 trillion yuan. (…)

Based on available data from regulators, the academy’s report said shadow-banking activities involving wealth-management products and trusts stood at 14.6 trillion yuan by the end of last year, equivalent to 29% of the country’s GDP. (…)

The growth of shadow financing could also make regulators’ credit-control measures less effective and may pose systematic risks to the economy, the think tank warned.

American Execs Say China is Getting Expensive, and Profitable Of all the challenges facing U.S. companies in China, costs top the list of concerns, with the majority saying they expect to give out hefty pay rises in the coming year

A survey of U.S. executives in China finds that, of all the challenges facing U.S. companies on the mainland, costs are at the top of their list of concerns

The cost of labor particularly has been rocketing in China, by double digits for many businesses the last few years. That’s prompted some U.S. manufacturing to leave China for other shores – including the U.S. and Mexico.

US-China Business Council

More than 90% of respondents said their China business is profitable, the highest level since the survey was started.

Overall, though, sentiment hasn’t changed much from the “tempered optimism” of recent years. Companies say that a range of longstanding problems – such as delays in licensing and other market barriers – generally have not improved.

Mobile Ad Spending Rises Sharply

Marketers are finally convinced that there’s money to be made advertising to the legions of consumers glued to their smartphones and tablets: Spending on mobile ads more than doubled in the first half of the year.

(…) Mobile-ad spending in the U.S. totaled $3 billion in the first half, up from $1.2 billion a year earlier, the Interactive Advertising Bureau estimates.

Adults in the U.S. are expected to spend an average of two hours and 21 minutes a day on smartphones and tablets this year, excluding time spent talking on phones, according to a recent study by eMarketer. In 2010, adults spent only 24 minutes on mobile devices, not counting talk time. (…)

Google is expected to capture 46.8% share of the U.S. mobile ad market this year, estimates eMarketer, thanks largely to Web searches conducted on mobile devices.

Facebook, too, is benefiting. After initially lagging behind in mobile, the Menlo Park, Calif., company has worked to bolster its mobile-ad products, an effort that is now bearing fruit.

Mobile accounted for 41% of its advertising sales in the second quarter, Facebook said. Facebook will have about 14.9% of the mobile ad market this year, eMarketer estimates.

Unilever said that 50% of its spending on Facebook goes to the social-network’s mobile products. (…)

Mobile’s share of total online ad spending in the U.S. more than doubled to 15% during the half, the IAB said. Overall U.S. online ad spending rose 18% to $20.1 billion during the period.

Spending on search and display ads continue to account for the bulk of the overall sector but their share of the total declined in favor of mobile advertising.

Spending on TV ads in the U.S. will increase 2.8% to $66.35 billion this year, eMarketer predicts. (…)

[image]Sad smile  Canadian Mogul Paul Desmarais Dead at 86 One of Canada’s wealthiest and most powerful businessmen, Paul Desmarais built a corporate empire by engineering a reverse takeover of Power Corp. of Canada and refocusing the company on financial services.


NEW$ & VIEW$ (24 SEPTEMBER 2013)

Global Manufacturing growth slowly gains momentum

The latest flash PMI data from Markit covering the eurozone, China and the US indicated a continuation of the tentative global manufacturing upturn in September. Growth was evident across all three regions, with all PMIs above the 50.0 no-change mark which separates growth from contraction for the second month running. Such a broad-based upturn has not been seen since mid-2011.

However, although growth accelerated to the fastest for six months in China, the manufacturing PMIs signalled weakening rates of expansion in both the US and eurozone, highlighting the ongoing fragility of the global economy.

Content to rent?
Americans change tack on property ownership

(…) The US home-ownership rate has dropped to an 18-year-low at about 65 per cent – down from a peak of 70 per cent before the crash – and economists say it is set to fall as low as 60 per cent. Some industry watchers are now asking if the US, after a multi-decade push towards home ownership, is shifting towards being a nation of renters. (…)

In recent years a sharp increase in foreclosures, amid job losses, decreased incomes and reduced asset values, has forced many one-time homeowners to rent. For each percentage point decline in home ownership, there has been a shift of approximately 1.1m households to the rental market. To meet this demand new construction of multi-family apartment blocks has surged 353 per cent since the housing market trough, while ground breakings of single-family homes has risen 78 per cent, commerce department data say.

(…) “For the first time since the 1920s, cities are growing faster than suburbs. More and more people are renting, from striving graduate students to the working poor, and the government needs to recognise this change.”

The idea that a structural shift is taking place has pushed institutional investors into the rental housing sector. Many are betting the business of buying single-family homes and converting them into rentals is not just a short-term, opportunistic bet on rising home prices but a sustainable business model that could grow into what Morgan Stanley says is a $100bn market opportunity. (…)

Just 74.8 per cent of Americans aged 25 to 34 are employed, which is closer to the low point during the recession (73-74 per cent) than to the pre-bubble norm (78-80 per cent), Bureau of Labor Statistics data show.(…)

But while home sales are up, new construction is rising and there are fewer homeowners in negative equity, household formation has not picked up at the same pace. Many analysts have predicted these “missing households” would make a comeback when the economy was on sounder footing. So far this has not happened.

This is largely because people aged between 18 and 34 are still not setting up households at a robust rate, according to an early analysis of 2013 population data by Jed Kolko, chief economist at property website Trulia.

They are being held back by problems pinning down a job, huge student debt burdens and difficulties saving up for a big downpayment – all barriers to household formation, Mr Kolko says.

This period of early adulthood is the prime time for people to get on to the property ladder in the US. But many of them are still living with their parents. The share of young adults doing so has risen to more than 31 per cent, from about 27 per cent before the crash.

Even as the national unemployment rate has declined to 7.3 per cent, the level among the country’s young adults is almost twice as high. More and more of these individuals are dropping out of the labour force altogether. (…)

High five  Housing “Recovery” Endgame Escalates


Och-Ziff were perhaps a little early but used the last 10 months to unwind their real estate and exit the landlord business as the hedge-fund sponsored echo-bubble in housing rolled over into the mainstream. “American-Homes-4-Rent”‘s IPO suggested a scramble to exit. With 60% of home purchases now being cash-only (explains the ongoing and massive layoffs in the mortgage business not just due to rate-driven weakening of demand), it is therefore a concern when one of the biggest funds playing in this space – OakTree Capital – announces plan to exit the buy-to-rent trade – selling roughly 500 fully-leased homes. As Reuters notes, it is yet another indication that early investors are looking to cash-out on the “recovery” in U.S. housing prices.

Via Reuters,

Oaktree, which manages about $76 billion, and its partner Carrington Mortgage Services are entertaining bids for the portfolio of fully-leased homes as they seek to exit from the buy-to-rent trade that has become popular the past two years with hedge funds and private equity firms.

Citigroup Cuts Mortgage Staffing

The end of the refinancing boom continues to shake up the U.S. banking sector, as Citigroup Inc. said Monday it laid off 1,000 workers in its mortgage business.

That brings to more than 7,000 the number of jobs lost at major lenders this year as the surge in home loans fades. (…)

Guy Cecala, Inside Mortgage Finance’s CEO, said that, in the wake of the housing meltdown and amid criticism over taking on risky home loans, banks moved more mortgage-related responsibilities in-house. As refinancing activity wanes and fewer homeowners default, banks are now paring back staff in an unprecedented way, Mr. Cecala said. “We’re just seeing the beginning of it,” he said.

Fingers crossed  Prices at the Pump Drop to Lowest Levels Since January

US manufacturers ‘reshoring’ from China
Shift reflects China’s ebbing low-cost advantage, survey says

(…)The Boston Consulting Group survey found 21 per cent of a sample of 200 executives of large manufacturers were either already relocating production to the US, or planning to do so within the next two years. A further 33 per cent said they were considering it, or would consider it in the near future.

Pointing up  Those figures are sharply increased from a similar BCG survey early last year, which found 10 per cent of respondents moving production to the US, and a further 27 per cent considering or close to considering it.

Labour costs were the factor most commonly cited by executives as determining location decisions, and China’s advantage has been slipping. Wage inflation has been running at about 15-20 per cent per year. Average hourly earnings in US manufacturing have risen just 1.6 per cent per year since 2011. (…)

BCG is predicting that, by the end of the decade, reshoring and rising exports will have created 0.6m-1.2m new manufacturing jobs in the US.

The effect will vary across industries, BCG says. Prime candidates for reshoring are industries that have relatively lower labour costs, and relatively higher transport costs or other reasons to be close to their customers.

Ready, ready, …


Risks Mount on Debt Ceiling President Obama’s strategy to not negotiate over terms for raising the nation’s debt ceiling carries risks to his political standing as lawmakers head for another showdown on the issue.

With no known talks now occurring among lawmakers over the debt ceiling, businesses, market analysts and lawmakers themselves are uncertain about whether a deal can be reached to avoid the government falling behind on its payments.

“It’s extremely dangerous,” said William Hoagland, who spent 25 years as a Senate Republican aide, primarily on budget matters. “To keep on flat-out saying ‘I’m not considering anything, I won’t consider anything,’ I would say that puts us in the risk of actually going over the brink.”

Others say Mr. Obama’s stance is a response to Republican demands that a higher debt ceiling be paired with other policies that Democrats are sure to reject, such as a delay in the new federal health law, a landmark of the president’s first term.

William Galston, a former policy adviser to President Bill Clinton, said both parties are contributing to the stalemate. “If this was a game of chicken, which it appears to be, then the consequences of miscalculation and a crash would be really horrendous,” he said.

Credit Suisse estimated Monday that the government will run out of money by Oct. 24 and that markets could become volatile beginning Oct. 10.


NEW$ & VIEW$ (28 AUGUST 2013)

Emerging-Market Rout Intensifies

The slide in many emerging-markets currencies and stocks intensified and oil prices climbed farther, as investors continued to worry about a possible U.S. strike against Syria.

The Indian rupee and Turkish lira—no strangers to selloffs since May—fell heavily, even by recent standards. The rupee plunged by 3.3% while the lira sank by 1.7%. Both hit record lows for the second consecutive day.

Syria isn’t a major oil producer, but there are fears that U.S. action could touch off a wider conflict. (…) Crude-oil futures spiked for a second day, with the front-month Brent contract hitting an intraday high of $117.34 a barrel in Asian trade. Recently, ICE Brent was $1.42 higher on the day at $115.78 a barrel. Nymex WTI also gained more than a dollar, to an 18-month high above $110 a barrel. (…)

Oil-producing Russia and Mexico have also seen their currencies slide, signaling that, for now, this is a broad-based wave of market nerves.


The composite index of manufacturing activity rebounded in August, climbing twenty-five points above the July reading to 14. The imagecomponents of that index all rose this month, with the index for shipments jumping to 17 from the previous reading of -15 and the index for new orders moving to 16 from -15. The marker for the number of employees picked up to 6 from July’s reading of 0.

Capacity utilization made a weak comeback, with the index ending the survey period at 3 compared to last month’s index of -9. The gauge for the backlog of orders declined by much less than a month ago, with that index settling at -6 from the previous reading of -24.


The index for the number of employees moved up to 6 in August following a flat reading a month ago. The indicator for the average manufacturing workweek also gained, picking up six points to post a reading of 8. In addition, average wage growth intensified, pushing the index to 13 from July’s reading of 8.


Mortgage applications fall as rates hit 2013 high: MBA

Applications for U.S. home loans fell for a third straight week as average mortgage rates hit their highest level this year, although demand for purchase loans increased, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 2.5 percent in the week ended August 23, after sliding 4.6 percent the prior week. (…)

The refinance index fell 5.4 percent last week, and the refinance share of total mortgage activity slid to 60 percent, the lowest since April of 2011.

The gauge of loan requests for home purchases, a leading indicator of home sales, held up better, rising 2.4 percent. (…)


U.S. Case-Shiller Home Price Index Increase Eases Again

Home price inflation eased further in June. The seasonally adjusted Case-Shiller 20 City Home Price Index rose 0.9% (12.1% y/y) on a seasonally adjusted basis after a 1.0% May gain. It was the third consecutive month of lessened increase following the 1.9% March jump. The result was to drop the 3-month annualized rate of increase to 15.3% from its record 20.2% recorded in March. Home prices in the narrower 10 city group rose 1.1% in June (11.9% y/y).


More Young Adults Live With Parents

In a report on the status of families, the Census Bureau on Tuesday said 13.6% of Americans ages 25 to 34 were living with their parents in 2012, up slightly from 13.4% in 2011. Though the trend began before the recession, it accelerated sharply during the downturn. In the early 2000s, about 10% of people in this age group lived at home.



Recent surveys by Pew found over 60% of people ages 18 to 34 knew someone who had moved back in with their parents because of the economy, he said, and that four of five people ages 25 to 34 who were living with their parents were satisfied with the arrangement.

The latest findings have important implications for the nation’s housing market and broader recovery, since they suggest fewer young Americans are buying houses, furniture and appliances—purchases that fuel much of the country’s economic growth.

Japan Auto Makers Cut Domestic Production

(…) The across-the-board decline in production suggests that there won’t be an immediate pick up in capital spending in Japan’s auto industry, undermining the efforts of Prime Minister Shinzo Abe to fix one of the weak links in the nation’s economic turnaround.

While Toyota and all other Japanese car makers reported solid quarterly profits in their latest earnings results, the growth is coming from overseas, which has made them reticent about increasing outlays at their domestic facilities.

Euro zone loan slump puts onus on ECB to keep rates low

Lending to the euro zone’s private sector contracted further in July, dragging on the euro zone’s nascent economic recovery and keeping up pressure on the European Central Bank to maintain its expansive monetary policy.

Private sector loans shrank by 1.9 percent from the same month a year ago, ECB data released on Wednesday showed.

A breakdown of the region-wide figure, which matched the lowest reading in a Reuters poll of economists, showed declines were generally steeper on the euro zone’s struggling periphery, adding to evidence that the recovery is uneven. (…)

Adjusted for sales and securitization, the drop in loans to the private sector was 1.4 percent on an annual basis, the biggest on the record.

An ECB survey released in July showed that euro zone banks, facing tougher capital requirements, tightened lending standards for both companies and home loans in the second quarter even though their access to funding eased. (…)


NEW$ & VIEW$ (26 AUGUST 2013)


Surprised smile Rate Shock: Sales of New U.S. Homes Fall on Mortgage Costs

The reading was the weakest since October and was lower than any of the forecasts by 74 economists Bloomberg surveyed.

The median estimate of economists surveyed by Bloomberg called for a decrease to 487,000. Forecasts ranged from 445,000 to 525,000.

The actual number was 394,000.

Disappointed smile The difference between July’s outcome and the average estimate of economists surveyed was 7 times larger the poll’s standard deviation, or the average divergence between what each economist forecast and the mean. That was the biggest surprise since April 2010.

The Commerce Department also marked down readings for each of the previous three months with June’s sales pace revised down to 455,000 from a previously reported 497,000 pace.

New-Home Sales Tumble

New-home sales fell 13.4% from June to an annual pace of 394,000, the Commerce Department said Friday. The drop, the steepest in three years, pushed sales down to the lowest level since October.

Because of how new-home sales are tallied—at the signing of the contract, rather than at the closing—economists said Friday’s data could be evidence that a rise in mortgage rates from the spring is starting to pinch the housing market, a key engine of the U.S. recovery. (…)

The report also showed that June sales were lower than previously estimated, with that month’s figure now at 455,000, compared with an initially reported 497,000.

Even with the decline, sales in July were 6.8% higher than a year ago.

The slower sales pace in part caused inventory to rise and median prices to dip. The median price for a new home slipped 0.5% to $257,200. The number of new homes listed for sale, seasonally adjusted, at the end of July was 171,000. The supply would take 5.2 months to deplete at the current sales pace.

Well, it looks like higher prices and mortgage rates do have an impact after all. Welcome to the real world (see my June 25 Facts & Trends: U.S. Housing A House Of Cards?). The Raymond James housing analyst sums it up:

The 13.4% sequential drop is one of the largest on record – aside from the nearly 34% sequential plunge in May 2010 when the first-time homebuyer tax credit expired. Notably, this report stands in stark contrast to the improving July NAHB homebuilder sentiment index and suggests new home sales have been materially impacted by the recent spike in mortgage rates. While still limited, rising levels of existing home inventory may also be negatively impacting demand for new homes. (…)

Relative to June, sales fell across all four regions, with the breakdown as
follows: Northeast (-5.7%), Midwest (-12.9%), South (-13.4%), and West (-16.1%).

Here’s the “relationship” with the Homebuilders Index which everybody watches. Remember that this index measures builders’ sentiment. I have warned repeatedly that the more objective “traffic index” has been a lot more subdued so far in 2013. (Next two charts courtesy of ZeroHedge)

Yes Virginia, mortgage rates do matter to ordinary people (just about everybody excluding economists and strategists).

Also, keep in mind that 10 year Treasury rates are still rising…which normally translates into higher mortgage rates…

image(Doug Short)

…with a 97% correlation:


More on ordinary folks: Charles Hugh Smith (Of Two Minds) posted several telling charts revealing the reality of the average American:

  • The number of social security beneficiaries jumped 25% (12 million people) to 57 million Americans since 2000 while full time employment declined to 114 million.


  • Less than 59% of Americans have a job.


    • Full time employment is now only 47% of total employment and has stalled at that low level.


  • Social security payments have ballooned exponentially.


  • Here’s how tight it is on main street:


The end result, illustrated by this next Doug Short’s chart, is that median income just made it back to its 2008 peak but real median income remains 7.9% below its 2008 peak which was unchanged from its 2002 level.

Click to View

From Family Dollar Stores’ Q2 conference call:

When we look at the Nielsen data, one thing that’s pretty clear is that our customer is spending less in the overall marketplace. (…) The biggest factor for the additional weakness, in my opinion, is the consumer is just more challenged than we had anticipated. She’s making choices. Things are very tough right now.

Very tough right now! And for quite a while. Who do you think will pay for all the social benefits and government deficits when so few Americans have a job and more and more of those workers have only part-time jobs? This is main street’s reality.

And now this: U.S. Sets Stage For Bigger Syria Role

Nerd smile  Barron’s Randall Forsyth:

So, will the Fed taper its bond purchases in September with housing activity slowing sharply, more bad news from retailers about consumer spending, and global markets cracking? And ahead of another possible debt-ceiling debacle and possible government shutdown on Oct.1?

It wouldn’t be the first policy blunder.

But, bad news can be good news for some:

The massive drop in new home sales will raise an eye-brow (or two) at the September 18 FOMC meeting, and could either delay tapering or result in a tinier taper than the market currently anticipates (a reduction of around $10-15 billion in asset purchases)…unless it’s offset by stronger economic data in the weeks ahead. (BMO)

More Homes for Sale, At Last

imageThe number of new homes for sale at the end of July reached a seasonally adjusted 171,000, an increase of 28,000 from a year earlier, the Commerce Department said Friday. That’s the largest annual gain in supply since November 2006.

Clock Clock Another delay for U.S. decision on Keystone

A decision on the controversial and much-delayed oil sands pipeline to the U.S. Gulf Coast could be pushed into 2014 as a U.S. watchdog examines whether contracts tied to the Keystone XL review process were wrongfully awarded and regulatory safeguards fully adopted.

The U.S. State Department’s Office of Inspector General (OIG) is holding an inquiry into whether it was appropriate for the government to hire Environmental Resources Management, a private contractor selected to conduct an environmental review of TransCanada Corp.’s proposed pipeline. (…)

The State Department does not have to wait for the OIG’s report in order to issue its decision on Keystone XL. Mr. Obama has previously said he will make a call in 2013. (…)

Good read: Currency sell-off: Victor Mallet looks at a tragedy in three acts for emerging markets

India, 1991. Thailand and east Asia, 1997. Russia, 1998. Lehman Brothers, 2008. The eurozone from 2009. And now, perhaps, India and the emerging markets all over again. (…)

The fuse igniting each financial explosion is inevitably different from the one before. Yet the underlying problems over the years are strikingly similar. (…)

First comes complacency, usually generated by years of high economic growth and the feeling that the country’s success must be the result of the values, foresight and deft policy making of those in power and the increasing sophistication of those they govern. (…)

The truth is more banal: the real cause of the expansion that precedes the typical financial crisis is usually a flood of cheap (or relatively cheap) credit, often from abroad. (…)

Phase Two of a financial crisis is the downfall itself. It is the moment when everyone realises the emperor is naked; to put it another way, the tide of easy money recedes for some reason, and suddenly the current account deficits, the poverty of investment returns and the fragility of indebted corporations and the banks that lent to them are exposed to view. (…)

Phase Three is when ministers and central bank governors survey the wreckage of a once-vibrant economy and try to work out how to rebuild it. (…)

The FT’s Lex column seeks to taper EM fears:

(…) After all, not every emerging market has taken a fall. Just look at Argentina, Vietnam, Nigeria and Macedonia as examples. The Buenos Aires main index is up almost a quarter in dollar terms since the start of the year. And in spite of the hysteria over Brazil’s real, the Bovespa stock market index has been rallying since July, as has Russia’s benchmark index. Both are up 8 per cent over the past two months alone. Granted, equity markets in Turkey and Indonesia have fallen by more than a quarter since their peaks this year, but they are at levels seen many times during the past five years. India’s Nifty index has only slipped to its 200-day moving average, where it has been seven times in the past four years.

In any case, as far as price is concerned, emerging market equity valuations are no longer exorbitant. Russia’s Micex index trades on five times expected earnings. It has hovered at this level for the past two years, but remains 25 per cent below its long-term average. The multiple for Brazil’s Bovespa index is 15 times – above its five-year average of 12 times, but it has been to 18 times twice over that period. And with India’s Nifty index trading on 13 times expected earnings it may not be a screaming buy – it fell to 8 times in 2008 – but it is still only half as expensive as it was back in March 2010.

Sure, all bets are off if interest rates in the developed world start rising quickly. The flood of liquidity has been a big driver of emerging market equities since the collapse of Lehman Brothers. But these funds must go somewhere. Asia still has a current account surplus. And the US and Europe remain fragile.

Pointing up  Fed Officials Rebuff Coordination Calls as QE Taper Looms

Federal Reserve officials rebuffed international calls to take the threat of fallout in emerging markets into account when tapering U.S. monetary stimulus.

The risk that the Fed’s trimming of bond buying will hurt economies from India to Turkey by sparking an exodus of cash and higher borrowing costs was a dominant theme at the annual meeting of central bankers and economists in Jackson Hole, Wyoming, that ended Aug. 24.

Emerging-market stocks have lost more than $1 trillion since May, according to data compiled by Bloomberg. That’s the month when Bernanke said the Fed “could take a step down” in its bond purchases. The MSCI Emerging Markets Index has fallen about 12 percent this year, compared with a 13 percent gain in the MSCI gauge of shares in advanced countries.

Such selloffs aren’t an issue for Fed officials who said their sole focus is the U.S. economy as they consider when to start reining in $85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to $3.65 trillion. Even as the Fed officials advised emerging markets to protect themselves, they were pressed by the International Monetary Fund and Mexican central banker Agustin Carstens to spell out their intentions better in the interest of safeguarding global growth.

“You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg Television’s Michael McKee. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”

Ghost Older folks like me might remember that that was exactly what Germany said in mid-October 1987. Then, it was the U.S. that was asking for more international cooperation and consideration, begging Germany to change its monetary policy in order to help the greenback. After Germany rebuked James Baker, markets realized there was actually little cooperation between central bankers and lost confidence that a solution would soon be found.

“It could get very ugly” in emerging economies as the probability of currency and banking crises grows, said Carmen Reinhart, the co-author of “This Time is Different: Eight Centuries of Financial Folly” and a professor at Harvard University. “Whenever emerging markets have faced rising international interest rates and softening commodity prices, let us not forget that it has not boded well.” (…)

Amid such concerns, IMF Managing Director Christine Lagarde warned that financial market reverberations “may well feed back to where they began.” She proposed “further lines of defense” such as currency swap lines.

“We advocate clarity, proper and well-channeled communications,” Lagarde told Bloomberg Television’s Sara Eisen in an Aug. 23 interview. “The signaling effect matters almost more than the implementation. The signal has to be very clear.”

Her call was echoed by Carstens, who urged the Fed to be more open about its strategy. “What would have the most impact right now would be to have a much better, clearer implementation of the tapering,” he said.

Adapting to advanced countries’ exit strategies is “the most pressing challenge for emerging economies,” Carstens said, noting the “turbulence in financial markets around the world once the tapering talk started.”

“It would be desirable to have monetary policy coordination,” he said. “To have the central banks of advanced economies to go in different directions, can become a source of instability.”


Bad Week for Earnings

While the unofficial end of earnings season came last week when Wal-Mart (WMT) reported, there were still 92 companies that reported this week.  And the results were not very pretty.  There were certainly a few solid reports from companies like Lowe’s (LOW), Best Buy (BBY) and Urban Outfitters (URBN), but the majority of companies that reported this week went down on their report days.  Of the 92 companies that reported, 53 saw their stocks decline on their report days, while just 39 posted gains.  Overall, the average stock that reported this week fell 1.65% on its report day, which is well below the average gain of 0.30% that stocks saw on their report days during the second quarter earnings season.

Forward guidance was notably weak as well.  Of the companies that reported, negative guidance outnumbered lowered guidance by a margin of 4 to 1. 

The above is from Bespoke Investment which tallies all NYSE companies.

The official S&P tally as of Aug. 22. reveals that 65% of the 488 S&P 500 companies having reported beat the estimates and 27% missed. Q2 EPS ended up at $26.36, up 3.7% YoY. Trailing 12-month earnings are now $99.28, up 0.9% from their level after Q1 and +0.6% YoY.

Analysts keep shaving their second half estimates but remain hopelessly optimistic. Q3 earnings are seen at $27.14, up 13% YoY while Q4 earning are estimated at $29.12, up 26% YoY.

Meanwhile, Factset reports that

For Q3 2013, 85 companies have issued negative EPS guidance and 18 companies have issued positive EPS guidance.

The number of preannouncements and the percentage of negatives are both higher than they were for Q1’13 and Q2’13 at the same stage. Actually, since Aug. 2, there have been only 2 positive preannoucements against 24 negative ones.

Bloomberg’s Rich Yamarone’s Orange Book Sentiment Index (a compilation of macroeconomic anecdotes gleaned from comments made by CEOs and CFOs on quarterly earnings conference calls) was 48.47 during the week ended Aug. 23, essentially unchanged from the 48.47 registered during the week ended Aug. 16. The Bloomberg Orange Book Sentiment Index marked its twenty-eighth consecutive week below 50. Sub-50 readings suggest contractionary conditions, while above-50 is indicative of expansion.

 High Profit Margins Point to Stock Pain


Mark Hulbert rehashes the mean-reversion risk. I humbly submit that my June 11 post Margins Calls Can Be Ruinous In Many Ways is a more complete analysis.

Wilted rose  China Rethinks Deals for Resources

(…) China has plowed $226.1 billion into outbound mergers and acquisitions to grab a slice of global resources since 1995, about a quarter of which was in the mining sector, according to data provider Dealogic. But people inside and outside the government say Beijing is taking a more careful look at projects.

“The government still encourages ‘going out,’ ” said Jin Bosong, deputy director of the Ministry of Commerce’s International Trade and Economic Cooperation Research Institute. “But now the emphasis is to make companies ask questions like: ‘Can the project make money?’ ” he said.

Mining projects are high on the list.

(…) Beijing’s barrage of iron-ore asset purchases in the last decade has yielded little. Ore imports from China-controlled global mines currently account for just 2.7% of the country’s total iron-ore imports, far below an official target of 40% set in 2011, according to data from Antaike, a Beijing-based consultancy, in June. (…)