NEW$ & VIEW$ (15 JANUARY 2014)

Consumers Spent Solidly in December

Just kidding This is the WSJ’s headline today. Below is the reality:

U.S. Retail Sales Post Moderate Year-End Increase

Retail spending increased 0.2% (4.1% y/y) during December after a 0.4% November gain, revised down from 0.7%. For all of last year retail sales increased 4.3%, the weakest increase of the economic recovery.

A 1.8% reduction (+5.9% y/y) in sales of motor vehicles & parts held back the increase in overall December sales. Nonauto retail sales rose 0.7% (3.7% y/y) after a 0.1% November uptick. Nonauto sales rose 3.4% during all of 2013, also the weakest gain of the recovery.

Higher sales of food & beverages led last month’s sales with a 2.0% gain (4.2% y/y) following two months of slippage. Clothing & accessory sales increased 1.8% (5.2% y/y) after a 0.5% November dip and gasoline service station sales rose 1.6% (0.6% y/y), after two months of decline. Sales of nonstore retailers showed continued strength with a 1.4% jump (9.9% y/y) following a 1.6% November gain. Furniture store sales dropped 0.4% (+4.5% y/y) after a 0.2% decline and building materials & garden equipment store sales slipped 0.4% (+2.1% y/y), down for the third month in the last five.

Not easy to get a clear measure of retail sales given the calendar quirks and bad weather. It is best to look at average sales growth for November and December.

  • Total retail sales: +0.3% (Nov.-Dec. avg) vs +0.5% in October.
  • Autos and Parts:  +0.1% vs +1.0%.
  • Non Autos ex Gas and Building Supplies: +0.5% vs +0.6%

Surprised smile Total sales for the October through December 2013 period were up 1.0% YoY.

Note that these figures are subject to big revisions. November’s surprising 0.7% original gain was revised down to 0.4%.

Pointing up U.S. Business Inventories Increase Slows

Total business inventories increased 0.4% in November (4.0% y/y), the slowest increase in three months. This inventory rise accompanied a 0.8% jump (4.0% y/y) in business sales after October’s 0.5% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

Pointing up In the retail sector, inventories advanced 0.8% (7.3% y/y) in November, including a 1.3% jump (13.7% y/y) in motor vehicles. Inventories excluding autos rose 0.6% (4.4% y/y).

Sad smile Taking the 3 months to November, retail inventories rose 2.9% sequentially while sales advanced only 0.7%. Ex-Autos: +1.3% vs +0.5%.

As I have been warning, there is clearly an inventory problem entering Q114. If you don’t believe me, read this:

Auto AutoNation CEO Calls U.S. Vehicle Inventories Too High

AutoNation Chief Executive Mike Jackson says new-car supplies in the U.S. are rising rapidly, putting pressure on auto companies as they try to avoid a profit-sapping price war.

(…) U.S. dealers have about $100 billion worth of unsold cars and trucks sitting on their lots, Mr. Jackson said. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run-up to the financial crisis and the auto-sales collapse of 2008-2009, Mr. Jackson said. Auto makers book revenue when a car is shipped, not when it is sold at the dealership.

At the end of 2013, auto dealers had 3.45 million cars and trucks in stock, enough to last 63 days at the current selling rate, according to research firm Autodata Corp. A 60-day supply of cars is typically considered as healthy by the industry.

High five But Mr. Jackson said the inventory levels are much higher than that—closer to 90 to 120 days of supply—if cars sold to fleets are excluded from the selling rate. (…)

AutoNation’s Mr. Jackson said discounts are starting to rise across the industry already, even if they aren’t as obvious to consumers.

Among them are “stair-step programs” where car companies give money directly to dealers in exchange for hitting monthly sales targets.

“What worries me is if the industry was as disciplined as it says it is we would have stopped before 3.5 million” vehicles at dealerships, Mr. Jackson said. He sees about a 50-50 chance the industry will resort to an all-out discount war.

“What I’m saying is you’re on the edge of a slippery slope and even sliding down it a bit,” he said. “It’s a risk.”

Auto Makers Dare to Boost Output

A string of new factories in the region will start cranking out a million or more cars over the next several years.

A large increase in production capacity poses a serious risk for auto makers. They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%. (…)

Some auto makers are already concerned about overcapacity.

“The last thing we need is to get bricks-and-mortar capacity increased,” Sergio Marchionne, chief executive of Chrysler Group LLC and Fiat SpA, said this week. Building new plants isn’t the only trend to watch, he added, because increasing the use of automated production lines can boost output at existing factories. (…)

Magna warns 2014 sales likely below analysts’ estimates

Canadian auto-parts giant Magna International Inc. is forecasting 2014 sales that are below analysts’ estimates.

Aurora, Ont.-based Magna said on Wednesday in its financial outlook that it anticipates total sales of between $33.8-billion (U.S.) and $35.5-billion in 2014, lower than the consensus analysts’ estimate of $35.8-billion.

Jobs Deal Collapses in Senate

(…) After more than a week of talks, lawmakers failed to reach agreement to revive benefits for the roughly 1.4 million people who have lost aid since last month. Senate Democrats rejected the latest proposal from a group of eight Republicans, while GOP lawmakers dismissed an overture from Senate Majority Leader Harry Reid (D., Nev.) to allow votes on a handful of Republican amendments.

The law that expired in December dates from the financial crisis and provided federal aid to supplement the 26 weeks of unemployment benefits provided by most states, giving up to 47 weeks of additional payments. The latest proposals from both Democrats and Republicans would scale that back to a maximum of 31 weeks. (…)

Several lawmakers said they hope to continue negotiations, but the Senate isn’t expected to return to the issue until late January after next week’s congressional recess. The Senate is shifting its focus on Wednesday to consider the short-term stopgap spending bill to prevent a partial government shutdown and the $1.012 trillion bill to fund the federal government through Sept. 30, the end of the current fiscal year. (…)

HOUSING WATCH

From Raymond James:

  • California’s November existing single-family home sales fell 3.4%, on a seasonally-adjusted basis relative to October as rising home prices and higher mortgage rates reduced affordability. Closed sales stood at the lowest level since July 2010, falling to an annual run rate of 387,520 units (down 12.0% y/y). We note on a sequential basis, sales fell for the fourth consecutive month in November and have now declined on a year-over-year basis in ten of the last eleven months. California’s non-seasonally-adjusted pending home sales index (PHSI) fell 9.4% y/y (versus -10.4% y/y in October), and declined 13.6% m/m as Golden State buyers’ sensitivity to interest rate swings becomes increasingly apparent.
  • Florida existing home sales fell 1.2% y/y in November, the first negative y/y comp since March 2012 and down from a +6.5% y/y comp in October. Sequentially, sales decreased 11.3% from October, fueled by the combined increase in prices and mortgage rates outpacing household income growth. According to November data from RealtyTrac, 62.7% of Florida homes sold were all-cash transactions, the highest level of any state and well ahead of the next closest state (Georgia, 51.3%).

German GDP Disappoints

German economic growth failed to gain momentum in the fourth quarter of 2013, but economists predict stronger growth this year

Germany’s gross domestic product expanded 0.4% in 2013, following growth of 0.7% in 2012, the Federal Statistics Office said on Wednesday. The economy grew 0.5% when taking account of the number of working days each year.

Based on the full-year figures, GDP increased around 0.25% in the three months through December—about the same rate as the third quarter—according to the statistics office, which is due to publish fourth-quarter national accounts in mid-February.

Productivity crisis haunts global economy
Report shows most countries failed to improve overall efficiency

A productivity crisis is stalking the global economy with most countries failing last year to improve their overall efficiency for the first time in decades.

In a sign that innovation might be stalling in the face of weak demand, the Conference Board, a think-tank, said a “dramatic” result of the 2013 figures was a decline in the world’s ability to turn labour and capital resources into goods and services.

Productivity growth is the most important ingredient for raising prosperity in rich and poor countries alike. If overall productivity growth disappears in the years ahead, it will dash hopes that rich countries can improve their population’s living standards and that emerging economies can catch up with the advanced world.

The Conference Board said: “This stalling appears to be the result of slowing demand in recent years, which caused a drop in productive use of resources that is possibly related to a combination of market rigidities and stagnating innovation.”

The failure of overall efficiency – known to economists as total factor productivity – to grow in 2013 results from slower economic growth in emerging economies alongside continued rapid increases in capital used and labour inputs. Labour productivity growth also slowed for the third consecutive year.

The decline in total factor productivity continues a trend of recent years in which the remarkable rise in the efficiency of emerging markets has slowed and in advanced economies it has declined. (…)

The Conference Board’s annual analysis of productivity uses the latest data to estimate economic growth in all countries, the increase in hours worked and the deployment of additional capital to estimate the efficiency of individual economies.

Globally, it found that labour productivity growth declined from 1.8 per cent in 2012 to 1.7 per cent in 2013, having been as high as 3.9 per cent in 2010. Total factor productivity dipped 0.1 per cent.

For the US it found that productivity gains of the early years of the crisis continued to be elusive in 2013, with labour productivity growth stable at 0.9 per cent in 2013.

The US trends were, however, better than those in Europe, which has seen extremely weak productivity growth alongside relatively muted unemployment in most large economies with the exception of Spain, where joblessness soared. Labour productivity grew 0.4 per cent in 2013, having fallen 0.1 per cent in 2012.

Mr van Ark said Europe’s problem in achieving more efficiency from its labour force stemmed from structural rigidities.(…)

Emerging economies saw rates of growth of productivity fall from extraordinarily rapid rates, even though the rate of growth at 3.3 per cent was still much higher than in advanced economies.

For China, the Conference Board said that, while “the statistical information for the latest years is sketchy, the indications are that sustained investment growth in China has not been accompanied by the efficiency gains (measured by total factor productivity growth) similar to those of the previous decade”. (…)

World Bank warns of emerging market risk
Capital flows could fall 80% if central banks move too abruptly

An abrupt unwinding of central bank support for advanced world economies could cause capital flows to emerging markets to contract by as much as 80 per cent, inflicting significant economic damage and throwing some countries into crises, the World Bank has warned.

Capital flows into emerging markets are influenced more by global than domestic forces, leaving them vulnerable to disorderly changes in policy by the US Federal Reserve, concludes a study by World Bank economists.

SENTIMENT WATCH

 

The Year-Two Curse

In a world full of January barometers, Super Bowl indicators and sell-in-May-and-go mantras, Jeffrey Kleintop, chief market strategist at LPL Financial, thinks he’s found an indicator that actually works: the “year-two curse.”

“Year two” refers to the second year of a presidential cycle, which is what we’re in right now. Per the chart below, courtesy of LPL, the middle of the year tends to be fairly volatile for investors.

“The start of the second quarter to the end of the third quarter of year two has consistently marked the biggest peak-to-trough decline of any year of the four-year presidential term,” Mr. Kleintop wrote in a note to clients.Since 1960, nine of the 13 presidential terms have suffered from the dreaded curse, as the S&P 500 fell in the second and third quarters of those years, he says. (…)

Still, Mr. Kleintop maintains a relatively bullish stance about the rest of the year. “We may again see some seasonal weakness, but there is no need to fear the curse,” he says. “In fact, the curse may be a blessing for some, allowing those who have been awaiting a long-overdue pullback a chance to buy. It is important to keep in mind that history shows that, on average, year two posts a solid gain for stocks, and the year-two curse is reversed by the end of the year.”

 
Share

NEW$ & VIEW$ (14 JANUARY 2014)

SMALL BIZ OPTIMISM BETTER

The December NFIB report just came out today. You will read about the overall results elsewhere. I am more interested in the details.

image

NFIB’s December survey did provide some positive signals, with the best
job creation figure since 2007 and a large increase in the percent of owners reporting actual capital outlays in recent months. The jump of 9
percentage points in December over November suggests that most of the
increase in spending came very late in the year. Expectations for real sales growth and for business conditions over the next six months improved substantially over November readings as well.

NFIB owners increased employment by an average of 0.24 workers per
firm in December (seasonally adjusted), the best reading since February 2006. Forty-eight (48) percent of the owners hired or tried to hire in the last three months and 38 percent reported few or no qualified applicants for open positions. This is not just a “skills” issue, but one of poor attitudes, work habits, timeliness, appearance and expectations, especially among the applicants for lower skill jobs.

image

Twenty-three (23) percent of all owners reported job openings they could not fill in the current period (unchanged), a positive signal for the unemployment rate and the highest reading since January 2008. Fourteen (14) percent reported using temporary workers, up 1 point from November. Job creation plans fell 1 point, falling to a net 8 percent, but maintaining the improved level of plans recorded last month. Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development.

Last Friday’s NFP report showed no signs of that.

  • Wages are on the rise:

Two percent reported reduced worker compensation and 17 percent
reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (up 5 points), the best reading since 2007. A net seasonally adjusted 13 percent plan to raise compensation in the coming months, down 1 point from November. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery.

image

image

Boy “Daddy, is this a margin squeeze above?”

  • While inventories are too high:

image

January retail sales are off to a slow start. Weekly chain store sales have dropped significantly in the past 2 weeks even though the 4-week m.a. remains at its recent peak levels. Weather or not, the goods are still on the shelves.

image

image

  • SMALL BIZ CAPITAL SPENDING

The frequency of reported capital outlays over the past 6 months
surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four (64) percent reported outlays, the highest level since early 2005. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 26 percent. Ten (10) percent characterized the current period as a good time to expand facilities. Of those who said it was a bad time to expand (61 percent), 31 percent still blamed the political environment, suggesting that at least for these owners, Washington is preventing their spending on expansion. The net percent of owners expecting better business conditions in six months was a net negative 11 percent, 9 points better than November but still dismal.

Euro-Zone Factory Output Jumps Industrial production rose at the fastest pace in 3½ years, an indication that the euro-zone economy likely grew for the third straight quarter.

The European Union’s statistics agency said industrial output in November was 1.8% higher than in October, and 3% higher than the year-earlier month.

Figures for October were revised higher, and Eurostat now estimates that output fell 0.8% during the month, having previously calculated they fell 1.1%.

The rise in output compared with the month earlier was the largest since May 2010, when output jumped 2%. When compared with the year-earlier period, the increase was the largest since August 2011, when output surged 5.5%.

image

The increase in industrial production was spread across much of the euro zone, with Germany recording a 2.4% rise, France a 1.4% increase, Spain a 1% rise and Italy a more modest 0.3% increase.

The rise was also spread across a number of different industries, led by manufacturers of capital goods, and including makers of intermediate and nondurable consumer goods. Manufacture of durable consumer goods fell 0.8%, however, an indication that households haven’t yet become confident enough about their prospects to make large purchases, such as of household appliances and cars.

For the 3 months ended in November, IP is up 0.8%, the same as for the three previous months. Capital Goods are notably strong: +1.2% last 3 months after +2.4% the previous 3 months.

image

Spain GDP growth fastest in six years
Caution urged as economy starts to emerge from gloom

Luis de Guindos, the economy minister, told parliament on Monday that gross domestic product rose 0.3 per cent in the three months to December, a marked increase from the 0.1 per rise in output in the third quarter. (…)


There was more good news from Spain’s long-suffering services sector, which in December grew at its fastest pace in more than six years. Surveys of business and consumer confidence also showed striking leaps at the end of last year, suggesting that companies and households alike are starting to sense that a turnround is at hand.

Taken in conjunction, the data lend strength to the argument that Spain is experiencing the early stages of a classic recovery cycle, with falling wages leading to a rise in competitiveness, followed by a surge in exports that allows companies to invest in new plant and machinery, new hiring and – eventually – a rise in domestic demand and government tax revenue. Spanish exports have been on a tear for the past two years, and business investment started rising in early 2013. (…)

The consumer side of the Spanish ledger remains weak, however.

image

Despite Slowdown, Employers in China Gave Bigger Raises Employers in China gave more-and bigger- raises last year on average than those elsewhere in Asia, a fresh sign that the country’s job market remains resilient despite slowing economic growth.

According to a survey by recruitment firm Hays, two-thirds of employers in China said they gave their workers raises during the last round of reviews of 6% or more—more than any other country surveyed. A majority, or 54%, of said they gave raises of between 6% and 10%, while 12% said they gave raises of more than 10%. Only 5% of employers in China said they gave no raises at all.

In contrast, in Asia as a whole, just 22% of employers said they gave raises between 6% and 10%, while only 7% said they doled out more than 10%. Across the region, paltry raises were common. In Hong Kong and Singapore, the survey notes, the majority of employers gave raises between 3% and 6%. And in Japan, despite the economic stimulus measures dubbed the Abenomics in 2013, 80% of employees received raises of 3% or less.

The survey featured 2,600 companies in China, Hong Kong, Japan, Singapore and Malaysia in professional sectors like  sales, marketing, engineering, human resources and accountancy & finance.

Chinese workers can also take heart in the fact that employers in China said they also plan to continue their generosity. For the next review, 58% of employers in China said they intend to give their staff a raise between 6%-10%, compared with less than a quarter of employers across Asia, the survey showed. (…) 

M&AAnimal spirits
Has the dealmaking cycle started to turn?

The burst of M&A activity announced on Monday – almost $100bn in total, including Suntory’s $16bn takeover of Beam Inc, Google’s $3.2bn purchase of Nest Labs and Charter’s $61bn move on Time Warner Cable – is enough for many bankers to declare that corporate animal spirits are back and the dealmaking cycle has finally started to turn, with activity taking place across all sectors and all regions.

“This is not just ‘animal spirits’, this is good, old-fashioned competition. If my competitor is growing, I need to grow. Yes, 2014 is different,” said Frank Aquila of law firm Sullivan & Cromwell. “Unlike the past three years when we have had a few big deals early in the year followed by disappointing levels of M&A activity, this year there is a high level of confidence that the global economy is growing and business confidence is the key ingredient to getting deals done.” (…)

 
Share

NEW$ & VIEW$ (13 JANUARY 2014)

DRIVING BLIND (Cont’d)

 

U.S. Hiring Slowdown Blurs Growth View

American employers added a disappointing 74,000 jobs in December, a tally at odds with recent signs that the economy is gaining traction and moving beyond the supports put in place after the recession.

The downbeat readings were partly attributed to distortions caused by bad weather, and many economists warned that the report may prove to be a fluke. Employers, too, are reporting a mixed take on the economy and their labor needs.

Government payrolls declined by 13,000 in December, and health care—usually a steady source of job growth—declined by 1,000. Construction jobs, which are often weather-dependent, declined by 16,000. Manufacturing payrolls expanded just 9,000.

Meanwhile, last month’s most significant job gains were in sectors that traditionally aren’t high-paying, such as retail, which added 55,000 positions. The temporary-help sector increased by 40,000.

One piece of good news in Friday’s report was a substantially revised increase in November’s tally, to 241,000 new jobs from 203,000.

Where Jobs Were Added

Weather or not? JP Morgan is rather cold about it (charts from WSJ):

The big question is how much of the disappointment was weather distortion. The 16,000 decline in construction payrolls is an obvious candidate as a casualty of cold weather in the survey week. Another clue comes from the 273,000 who reported themselves as employed but not at work due to bad weather, about 100,000 more than an average December. Caution should be taken in simply adding this 100,000 to the nonfarm payroll number, as the nonfarm number counts people as employed so long as they were paid, whether or not they were at work.

Our educated guess is weather may have taken 50,000 off payrolls. It’s hard to see how the weather — or anything else — was to blame for the 25,000 decrease in employment of accountants. Another outlier was health care employment, down 6,000 and the first monthly decline in over a decade, undoubtedly a data point that will enter the civic discussion on health care reform.

Weak personal income:

The weak payroll number was accompanied by a shorter work week and little change in hourly pay. The workweek fell by six minutes to 34.4 hours in December. Hourly pay for all employees increased only 2 cents, or 0.1%, to $24.17, less than the 0.2% gain forecasted.

The combination of weak net new jobs, fewer hours and very small pay raises suggests wages and salaries hardly grew last month. Since “wages and salaries” is the largest component of personal income, the household sector probably didn’t see much income growth in December. And the gain was even less when inflation is taken into account.

BloombergBriefs explains further:

A negative in the report was the underlying trend in average hourly wages, which slowed to a 0.1 percent month-over-month gain and 1.8 percent on a year-ago basis. Using data on hours worked and earnings, one can craft a labor income proxy that is up 1.8 percent, well below its
20-year average of 3 percent.

This is critical with respect to the growth outlook in the current quarter. During the past two quarters the growth picture has improved, due in part due to an increase in inventory accumulation. Given the increase in hourly wages and the labor income proxy, households may need to pull
back on spending in the first three months of the year, which increases the risk of a noticeable negative inventory adjustment in the first quarter.

image

 

Fed Unlikely To Alter Course

Friday’s disappointing jobs report is likely to curb the Fed’s recent enthusiasm about the U.S. economic recovery, but it seems unlikely to convince officials they should alter the policy course Bernanke laid out.

That is even though the economy averaged monthly job gains of 182,000 positions last year. That is roughly the same as the 183,000-a-month pace of 2012 and 2011 average of 175,000. Is employment actually accelerating other than through the unemployment rate lens? The WSJ gets to the point:

(…) The report exacerbated another conundrum for officials.

The jobless rate, at 6.7% at year-end, is falling largely because people are leaving the labor force, reducing the numbers of people counted as unemployed.

Because the decline is being driven by unusual labor-force flows—aging workers retiring, the lure of government disability payments, discouraged workers and other factors—the jobless rate is a perplexing indicator of job-market slack and vigor.

Yet Fed officials have tied their fortunes to this mast, linking interest-rate decisions to unemployment-rate movements. Since late 2012, the Fed has said it wouldn’t raise short-term interest rates until after the jobless rate gets to 6.5% or lower. In December, officials softened the link, saying they would keep rates near zero “well past” the point when the jobless rate falls to 6.5%.

Most officials didn’t expect that threshold to be crossed until the second half of this year. At the current rate, it could be reached by February.

The jobless-rate movement and the Fed’s rhetoric create uncertainty about when rate increases will start. Short-term interest rates have been pinned near zero since December 2008, and officials have tried to assure the public they will stay low to encourage borrowing, investment, spending and growth.

Now, the public has more questions to consider: What does the Fed mean by “well past” the 6.5% threshold? Is that a year? A few months? How does it relate to the wind-down of the bond-buying program? What does it depend upon?

It will be Ms. Yellen’s job to answer the questions. Mr. Bernanke’s last day in office is Jan. 31.

To Tell the Truth 2000-2002.jpgRemember the To Tell The Truth game show?

  • Supply/demand #1: Oversupply

The total number of jobs in the U.S. hit a peak of about 138 million in January 2008, one month after the start of the most recent recession.

In the ensuing downturn, nearly nine million jobs disappeared through early 2010, when the labor market started turning around.

Job gains accelerated in 2011 and have remained fairly steady since, edging up a bit each year.

To date, almost 8 million jobs have returned, leaving a gap just shy of 1 million, which is likely to be closed this year. But that doesn’t account for changes in the population.

If the population keeps growing at that same rate, and the U.S. continues to add jobs near 2013’s pace, then the total number of nonfarm jobs in the U.S. won’t get back to where they should be until 2019. If the pace picks up in 2014 and beyond — say to 250,000 a month — the gap will narrow sooner, in 2017.

That said, the U.S. economy hasn’t added an average 250,000 jobs or more a month since 1999.

  • Supply/demand #2: Shortage

BlackRock: Jobs Report Shows Unemployment Is Structural

BlackRock fixed-income chief Rick Rieder says this morning’s disappointing December jobs report underscores the structural nature of an unemployment situation that’s beyond the control of the Federal Reserve.

“My view on unemployment is structural – you can’t fix it with quantitative easing,” Rieder tells Barron’s today. He said the disappointing number of jobs added can’t all be blamed on bad December weather, and that the labor force participation rate keeps dropping. “It means you have an economy that’s growing faster, and you don’t need people because of technology…. You’ve got all this economic data that’s strong but you don’t need people to do it.” (…)

  • Supply/demand #3: Dunno!

(…) imageAt least some of the decline in participation reflects demographic factors, including the Baby Boom generation moving into retirement age and younger people staying in school longer. But the participation rate for people age 25 to 54, which shouldn’t be affected much by such factors, has fallen to 80.7%, from 83.1% at the end of 2007.

Here’s the optimistic view…

This suggests the pool of people available for employment is substantially higher than the unemployment rate implies. So even if job growth does, as most economists expect, rev back up, it will be a while before companies need to pay up to attract workers. Indeed, average hourly earnings were up just 1.77% in December versus a year earlier, the slowest gain in more than a year. The net result is inflation may be even more subdued in the years to come than the Fed has forecast.

…but that optimism assumes that the drop-outs are simply waiting to drop back in, a view not shared by the Liscio Report (via Barron’s):

(…) But our friends at the Liscio Report, Doug Henwood and Philippa Dunne, find a rather different story, especially among younger groups: The vast majority of folks not in the labor force don’t want a job, even if one is available. That’s what they tell BLS survey takers anyway.

Data going back to 1994 show a steady uptrend in the percentage of young (16 to 24-year-old) and prime-age (25 to 54) Americans not in the labor force, with parallel rises in the number not wanting to work. Among younger ones, the percentage staying in school has remained around 1%, with no discernible trend, notwithstanding anecdotes of kids going to grad school while employment opportunities are scarce. Meanwhile, the overall share out of the labor force because they’re discouraged, have family responsibilities, transportation problems, illness, or a disability has stayed flat at around 1% since the BLS started asking this question in the current form in 1994, they add.

And, notwithstanding anecdotes of retiring boomers, the 55- to 64-year-olds were the only group in which the percentage not in the labor force and not wanting a job fell from 1994 to 2013. Perhaps they’ve got to keep working to support their kids, who aren’t? Annoyed

While there was some improvement in December, the number of those not in the labor force is surprising, to put it mildly — up some 2.9 million in the past year and up 10.4 million, or 13%, since July 2009, when the recovery officially began. The number of these folks who want jobs is down 600,000 in the past year, despite a 332,000 rise last month.

Pointing up “What is interesting,” Philippa observes, is that the number who wanted jobs “was climbing from late 2007 until the summer of 2012, when it hit 6.9 million. Since then, it’s been falling, and is down to 6.1 million, or minus 12%.”

Maybe there are a few millions there:

cat

I don't know smile For Yellen’s sake! Would the true supply/demand equation please stand up.

This is not trivial. We are all part of this extraordinary experiment by central bankers. History suggests that such massive liquefaction tends to fuel inflation but there are no sign of that in OECD countries. In fact, the JCB is fighting deflation while the ECB is pretty worried about it. In the U.S., the Fed has pegged its monetary policy on the unemployment rate but it is realizing that its peg is anchored in moving sands.

Actual employment growth is stable at a sluggish level but the unemployment rate is dropping like a rock. Could labour supply be much lower than generally thought? What is the U.S. real NAIRU (non-accelerating inflation rate of unemployment)? Truth is, nobody really knows.

But here’s what we know, first from David Rosenberg:

While it is true that employment is still lower today than it was at the 2007 peak, in some sense this is an unfair comparison. Many of those jobs created in the last cycle were artificial in the sense that they were created by an obvious unsustainable credit bubble. The good news is that non-financial employment has now recouped 95% of the recession job loss and is now literally two months away (390k) from attaining a new all-time high.  (…) it is becoming increasingly apparent that this withdrawal from the jobs market is becoming increasingly structural. (…)

With the pool of available labour already shrinking to five-year lows and every measure of labour demand on the rise, one can reasonably expect wages to rise discernably in coming years, unless, that is, you believe that the laws of supply and demand apply to every market save for the labour market. Let’s get real. By hook or by crook, wages are going up in 2014 (minimum wages for sure and this trend is going global). (…)

With this in mind, the most fascinating statistic in the recent weeks was not ISM or nonfarm payrolls, but the number of times the Beige Book commented on wage pressures. Try 26. That’s not insignificant. (…)

As I sifted through the Beige Book to see which areas of the economy were posting upward wage pressures and growing skilled labour shortages I could see a large swath – Technology, Construction, Transportation Services, Restaurants, Durable Goods Manufacturing. (…)

Now this from yours truly:

Minimum wages are going up significantly in 2014 in states like California (+12.5%), Colorado (+12.5%), Connecticut  (+5.5%), New Jersey (+13.8%), New York (+10.3%). These five states account for 25% of the U.S. population and 28% of its GDP. Obama intends to push for a 39% hike in the federal minimum wage to $10.10. In effect, many wages for low-skill jobs are tied to minimum wages.

The irony is that minimum wages affect non-skilled jobs which are clearly in excess supply currently. As we move up the skill spectrum, evidence of labour shortages is mounting in many industries and wages are rising.

Small businesses create the most jobs in the U.S. The November 2013 NFIB report stated that

Fifty-one percent of the owners hired or tried to hire in the last three months and 44 percent (86 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. This is the highest level of hiring activity since October, 2007.

Twenty-three percent of all owners reported job openings they could not fill in the current period (up 2 points), a positive signal for the unemployment rate and the highest reading since January, 2008.

  • Unfilled job openings are almost back to historical peaks if we exclude the two recent bubbles.

image image

  • Employers have been more willing to hire full time employees:

image

  • Quit rates have accelerated lately, indicating a greater willingness to change jobs. People generally decide to change employers because they are offered better salaries.

image 

  • Hence, average hourly wages have been accelerating during the last 12 months.

image

Nothing terribly scary at this point but the present complacency about labour costs and inflation is dangerous. Wages were rising by 1.5% in 2012 and they finished 2013 at +2.2%. Meanwhile, inflation decelerated from 2.0% in 2012 to 1.2% at the end of 2013 as did real final sales from +2.8% at the end of 2012 to +1.8% in Q313. What’s going to happen if the U.S. economy accelerates like more and more economists are now predicting.

Certainly, the economy can accelerate without cost-push inflation if there is as much slack as most believe. But is there really as much slack? Recent evidence suggests that there is less than meets the eyes. If that is true, investors will soon start to worry about rising corporate costs and interest rates.

All this so late in the bull market!

Punch Time to join the Fed and start tapering…your equity exposure.

Meanwhile,

Subprime Auto Lenders to Ease Standards Further: Moody’s

(…) Originations of subprime loans have increased to their highest levels since the financial crisis, with quarterly volume reaching $40.3 billion in the second quarter of last year, up from a recent low of $14.9 billion in late 2009 and the most since the second quarter of 2007, according to Equifax. Subprime auto loan volume was $39.8 billion in the third quarter.

Cheaper financing for lenders increases the difference between their costs and the rates they charge to consumers. In the third quarter, those rates averaged 9.64% and 14.25% for new and used cars, respectively, Moody’s said. High rates give lenders “room” to make weaker loans because of the cushion that the thicker profits provide against losses, the firm said. (…)

Lenders may cut standards more to grab market share as the pace of auto sales slow and the number of subprime borrowers stops expanding, the rating firm said.

Examples of weaker lending include larger amounts and longer loan terms, Moody’s said. The average term for subprime loans rose to 60.9 months from 59.9 months in the third quarter from a year earlier, it said. (…)

Why This European Is Bullish on America The billionaire founder of Ineos says the shale revolution is making the U.S. a world-beater again. It would be ‘unbeatable’ with a lower corporate tax rate.

(…) Seven or eight years ago in his industry, “people were shutting things down” in America “because it wasn’t competitive. Now it’s become immensely competitive.” (…)

On the contrary, Europe has “the most expensive energy in the world.” The Continent has been very slow to move on shale gas, and the U.K. has only lately, and somewhat reluctantly, started to embrace fracking. (…)

“There’s lots of shale gas around” in the U.K. and elsewhere, Mr. Ratcliffe says. But “in Texas there are 280,000 active shale wells at the moment. . . . And I think a million wells in the United States” as a whole. By contrast, “I think we have one, at the most two, in the U.K., and I don’t think there are any in France.” The French made fracking illegal in 2011, and the country’s highest court upheld the ban in October. (…)

Social protections in Europe make it much more expensive to shut down underperforming plants. Many Europeans will say, “Yes, that’s the idea. To protect jobs.” (…)

But Mr. Ratcliffe argues that European-style social protections lead to under-investment that ultimately benefits no one. (…)

By contrast, he says, in America “you’d just shut it down.” Which is why, he adds, “in America all our assets are good assets, they all make money.” That may sound like a European social democrat’s nightmare, but Mr. Ratcliffe takes a longer view, explaining that if the lost money had instead been invested in new capacity, the company would be healthier, employees’ jobs more secure and better-paying because the plant would be profitable. This logic is unlikely to persuade Europe’s trade unions, but Mr. Ratcliffe says that the difficulty and expense of restructuring is one of the things holding back Europe—and its workers.

(…)  Mr. Ratcliffe’s “only gripe” about the U.S.—”you have to have a gripe,” he says—is that America “has the highest corporate tax rates in the world: “They’re too high in my view, nearly 40%. And that’s a pity because in most other parts of the world corporate tax rates are about 25%.”

(…) If you weren’t paying all that tax, what you’d do is, you’d invest more. And we’d probably spend the money better than the government would.”

His suggestion for Washington on corporate taxes: “I think they should bring that down to about 30% or so. Then they’d be unbeatable. For investment, they’d be unbeatable, the United States.”

Light bulb Total joins UK’s pursuit of shale boom 
Oil group will be first major to explore British deposits

(…) The deal, to be announced on Monday, will be seen as a big vote of confidence in the UK’s fledgling shale industry. The coalition has made the exploitation of Britain’s unconventional gas reserves a top priority, offering tax breaks to shale developers and promising big benefits to communities that host shale drillers. (…)

George Osborne, chancellor, has argued that shale has “huge potential” to broaden Britain’s energy mix, create thousands of jobs and keep energy bills low. (…)

A boom in North American production from shale means natural gas in the US is now three to four times cheaper than in Europe. Cheap gas has driven down household energy costs for US consumers and sparked a manufacturing renaissance.

The coalition says Britain could potentially enjoy a similar bounty. It points to recent estimates that there could be as much as 1,300tn cubic feet of shale gas lying under just 11 English counties in the north and Midlands. Even if just one-10th of that is ultimately extracted, it would be the equivalent of 51 years’ gas supply for the UK. (…)

Italy’s November Industrial Output Rises

Italian industrial production rose for the third consecutive month in November, increasing by 0.3% compared with October in seasonally-adjusted terms, national statistics institute Istat said Monday.

Italy’s industrial production rose 0.7% in October compared with September, suggesting industry is on course to lift the country’s gross domestic product into expansionary territory in the fourth quarter.

Output rose 1.4% compared with November 2012 in workday-adjusted terms, the first annualized rise in two years, Istat said.

EARNINGS WATCH

The Q4 earnings season gets serious this week with bank results starting on Tuesday. So far, 24 S&P 500 companies have reported Q4 earnings. The beat rate is 54% and the miss rate 37% (S&P).

Still early but not a great start. Early in Q3, the beat rate was closer to 60%. Thomson Reuters’ data shows that preseason beat rate is typically 67%.

Historically, when a higher-than-average percentage of companies beat their estimates in the preseason, more companies than average beat their estimates throughout the full earnings season 70% of the time, and vice versa.

Q4 estimates continue to trickle down. They are now seen by S&P at $28.14 ($107.19 for all of 2103), rising to $28.48 in Q1 which would bring the trailing 12m total to $109.90. Full year 2014 is now estimated at $121.45, +13.3%. This would beat the 2013 advance of 10.7%. Margins just keep on rising!

SENTIMENT WATCH

Goldman Downgrades US Equities To “Underweight”, Sees Risk Of 10% Drawdown (via ZeroHedge)

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

We downgrade the US equity market to underweight relative to other equity markets over 3 months following strong performance. Our broader asset allocation is unchanged and so are almost all our forecasts. Since our last GOAL report, we have rolled our oil forecast forward in time to lower levels along our longstanding profile of declining prices. We have also lowered the near-term forecast for equities in Asia ex-Japan slightly. Near-term risks have declined as the US fiscal and monetary outlook has become clearer.

Our allocation is still unchanged. We remain overweight equities over both 3 and 12 months and balance this with an underweight in cash over 3 months and an underweight in commodities and government bonds over 12 months. The longer-term outlook for equities remains strong in our view. We expect good performance over the next few years as economic growth improves, driving strong earnings growth and a decline in risk premia. We expect earnings growth to take over from multiple expansion as a driver of returns, and the decline in risk premia to largely be offset by a rise in underlying government bond yields.

Over 3 months our conviction in equities is now much lower as the run-up in prices leaves less room for unexpected events.Still, we remain overweight, as near-term risks have also declined and as we are in the middle of the period in which we expect growth in the US and Europe to shift higher.

Regionally, we downgrade the US to underweight over 3 months bringing it in line with our 12-month underweight. After last year’s strong performance the US market’s high valuations and margins leaves it with less room for performance than other markets, in our view. Our US strategists have also noted the risk of a 10% drawdown in 2014 following a large and low volatility rally in 2013 that may create a more attractive entry point later this year.

And this:

Ghost “Equity sentiment is, unsurprisingly, very bullish and Barron’s annual mid-December poll of buy- and sell-side strategists revealed near unanimity in terms of economically bullish sector views,” notes BCA Research in a note titled, “U.S. Equity Froth Watch.” Similarly, Citi strategists’ sentiment measure finds that “euphoria” has topped the 2008 highs and is back to 2001 levels. At the same time, the negativity toward bonds is nearly universal. (Barron’s)

But: Stock Bargains Not Hard to Find, JPMorgan Says

(…) Lee notes that by simply dividing the S&P 500 into equal groups leaves 125 stocks that have an average P/E of 11.8 times forward earnings, with a range of 8x to 13x. Not only are these stocks cheaper than the market, they’re not lacking for growth either, Lee says. The average member of this group should grow by about 11%, far lower than the most expensive stocks’ 20% growth rate, but at less than half the valuation.

“In other words,” Lee writes, “there remains a substantial portion of the market offering double-digit growth for a mere 11.8x P/E.”

Lee screened for stocks with low P/Es, positive net income growth, that had Overweight ratings by JPMorgan analysts and upside to analyst target prices. He found 19 (…)

GOOD QUOTES

Barron’s Randall Forsyth:

But truth to tell, the governor’s staff might not actually have been to blame. They may only have been taking active steps to stem the exodus from the Garden State’s sky-high taxes and housing costs. According to surveys by both United Van Lines and Allied Van Lines, New Jersey was at or near the top of states of outbound movers in 2013. And U.S. census data for 2011 showed 216,000 leaving the Garden State and 146,000 moving in, with New York the No. 1 destination. So, blocking access to the GW Bridge may simply have been a misguided effort to stanch the outflow.

Or the whole episode could have been the result of a simple misunderstanding on the part of the staff. According to one market wag, the governor’s actual order was to “close the fridge.”

Open-mouthed smile LAST, BUT CERTAINLY NOT LEAST, our third granddaughter, Pascale, will see the world today!

 
Share

NEW$ & VIEW$ (9 JANUARY 2014)

Yellen Eyes Turnover as U.S. Workers Leave Jobs

More Americans are voluntarily quitting their jobs as they become increasingly confident about business conditions — a trend that Janet Yellen, the next Federal Reserve chairman, is monitoring.

Almost 2.4 million U.S. workers resigned in October, a 15 percent increase from a year earlier, based on seasonally adjusted data from the Department of Labor. These employees represent 56 percent of total separations, the 13th consecutive month above 50 percent and highest since April 2008. November figures are scheduled to be released Jan. 17. (…)

The quits ratio is highly correlated with how Americans feel about the job market and is especially helpful because it separates behavior from intentions, showing “what people are doing, not what they say they’ll do,” Colas said. “Voluntarily leaving one’s position requires a fundamental level of confidence in the economy and in one’s own personal financial story.” The ratio in November 2006, about a year before the recession began, was 58 percent.

The share of Americans who say business conditions are “good” minus the share who say they are “bad” rose in December to the highest in almost six years: minus 3 percentage points, up from minus 4.2 points the prior month, based on data from the Conference Board, a New York research group.

Job seekers also are more optimistic about the hiring environment. Sixty-three percent of callers to a job-search-advice help line Dec. 26-27 said they believed they could find new employment in less than six months, up from 55 percent a year ago, according to Challenger, Gray & Christmas Inc., a human-resources consulting company. (…)

U.S. December planned layoffs plunge to lowest since 2000: Challenger

The number of planned layoffs at U.S. firms plunged by 32 percent in December to the lowest monthly total in more than 13 years, a report on Thursday showed.

Employers announced 30,623 layoffs last month, down from 45,314 in November, according to the report from consultants Challenger, Gray & Christmas, Inc.

The last time employers announced fewer job cuts was June of 2000, when 17,241 planned layoffs were recorded.

The figures come a day ahead of the closely-watched U.S. non-farm payrolls report, which is forecast to show the economy added 196,000 jobs in December. (…)

The December figure fell 6 percent from a year earlier, when planned layoffs totaled 32,556, and marked the third straight month that announced workforce reductions dropped year over year. (…)

U.S. Consumer Credit Growth Eases

The Federal Reserve Board reported that consumer credit outstanding increased by $12.3 billion (6.1% y/y) during November following an unrevised $18.2 billion October gain. The latest monthly gain was the weakest since April.

Usage of non-revolving credit increased $11.9 billion (8.2% y/y) in November. Revolving credit outstanding gained $4.3 billion (1.0% y/y) in November.

Auto Markit Eurozone Sector PMI: Automobiles & auto parts posts its best quarterly performance since Q1 2011

Despite recent growth being high in the context of historical survey data, automobiles & auto parts still maintains some forward momentum heading into the New Year. New orders increased sharply and to the greatest degree in three years in December, leading to a substantial build-up of outstanding business. Job creation, which has until now been muted relative to the trends in output and new business, therefore looks set to pick up.

image

 

German Industrial Output Rises First Time in Three Months

Output, adjusted for seasonal swings, increased 1.9 percent from October, when it fell 1.2 percent, the Economy Ministry in Berlin said today. Economists predicted a gain of 1.5 percent, according to the median of 32 estimates in a Bloomberg News survey. Production climbed 3.5 percent from a year earlier when adjusted for working days.

German Orders Surge Back But Domestic Orders Lag

German orders rose by 2.1% in November, rebounding from a 2.1% drop in October. The headline trend shows solid growth with three-month growth at a 12.7% annual rate, up from a 6.2% annual rate over six-months and a 6.8% annual rate over 12-months. The strength is led by foreign demand.

Foreign orders rose by 2.2% in November from a 2.2% drop in October but also logged a 6.3% increase in September. As a result, foreign orders are rising at a 27.1% annual rate over three-months, up from a 12.8% annual rate over six-months, and a 9% annual rate over 12-months.

In contrast, domestic orders rose by 1.9% in November, unwinding a 1.9% drop in October. However, domestic orders also fell by 0.9% in September. As a result, the trend for domestic orders is poor. It is not just weaker than foreign orders – it is poor. Domestic orders are falling at a 3.8% annual rate over three-months following a 1.9% annual rate drop over six-months and a 3.9% annual rate gain over 12-months. The domestic sector is in a clear deceleration and contraction.

China’s 2013 Vehicle Sales Rose 14%

The CAAM said sales of both passenger and commercial vehicles totaled a record 21.98 million units, up 14% from a year earlier, the fastest pace since 2010. Passenger vehicles led the way, with sales up 16% to 17.93 million units.

Sales gain in December quickened due in part to local consumers’ habit of spending ahead of the Lunar New Year, which falls in the end of January this year. Auto makers shipped 2.13 million vehicles to dealers, up 18% from a year earlier. Among the total, sales of passenger vehicles were 1.78 million units, up 22% on year.

Even as China’s economy displayed clear signs of a slowdown, consumers bought new vehicles, motivated by some cities’ pending restrictions on car purchases to alleviate traffic congestion and air pollution. Within hours after the northern city of Tianjin announced a cutback on new license plates last month, thousands of residents rushed to buy cars. Some used gold necklaces as collateral, said local media.

CAAM said it expects gains to continue this year, though at a slower pace. The association projected a rise of 8%-10% for the overall auto market, to about 24 million units, and as much as an 11% gain for passenger vehicles, to nearly 20 million units.

“China’s auto market is still at the period of rapid expansion and growth has gradually shifted to small-sized cities where demand is significant,” said Shi Jianhua, deputy secretary-general at the CAAM.

China Consumer Inflation Eases

The consumer-price index rose 2.5% in December from a year earlier, slower than the 3.0% year-over-year rise in November, the National Bureau of Statistics said Thursday.

In the December price data, food remained the key contributor to higher prices, rising 4.1% year on year in December. But that was down from the 5.9% rise the previous month. Nonfood prices were up 1.7% in December, compared with November’s 1.6% gain.

But in a continued sign of weak domestic demand, prices at the factory level fell once again, declining for the 22nd consecutive month. They were down 1.4% in December, falling at the same rate as in November.

Stripped of food prices, inflation edged up to 1.7% YoY from 1.6% in November.

OECD Inflation Rate Rises

The Organization for Economic Cooperation and Development said Thursday the annual rate of inflation in its 34 developed-country members rose to 1.5% from 1.3% in October, while in the Group of 20 leading industrial and developing nations it increased to 2.9% from 2.8%.

The November pickup followed three months of falling inflation rates, but there are indications that it will prove temporary. Figures already released for December showed a renewed drop in inflation in two of the world’s largest economies, with the euro zone recording a decline to 0.8% from 0.9%, and China recording a fall to 2.5% from 3.0%.

Key Passages in Fed Minutes: Consensus on QE, Focus on Bubbles

Federal Reserve officials were largely in agreement on the decision to begin winding down an $85 billion-per-month bond-buying program. As they looked to 2014, they began to focus more on the risk of bubbles and financial excess.

    • Some … expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated.
    • Several [Fed officials] commented on the rise in forward price-to-earnings ratios for some small cap stocks, the increased level of equity repurchases, or the rise in margin credit.

Pointing up Something the Fed might be facing sooner than later:

Bank dilemma Time for Carney to consider raising rates

When your predictions are confounded, do you carry on regardless? Or do you stop, think and consider changing course? Such is the remarkable recovery in the UK economy since the first quarter of last year that the Bank of England is now facing this acute dilemma.

Just five months ago, the bank’s new governor pledged that the BoE would not consider tightening monetary policy until unemployment fell to 7 per cent so long as inflationary pressures remained in check. (…)

The question is what the BoE should now do. Worst would be to show guidance was entirely a sham by redefining the unemployment threshold, reducing it to 6.5 per cent. Carrying on regardless of the data is no way to run monetary policy. Instead, the BoE should be true to its word and undertake a thorough consideration of a rate rise alongside its quarterly forecasts in its February inflation report. (…)

EARNINGS WATCH

I have been posting about swinging pension charges in recent months. Most companies determine their full year charge at year-end which impacts their Q4 results.

Pendulum Swings for Pension Charges

Rising interest rates and a banner year for stocks could lift reported earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Rising rates and a banner year for stocks could lift earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Companies including AT&T Inc. and Verizon Communications Inc. could show stronger results than some expect when they report fourth-quarter earnings in coming weeks. They and about 30 other companies in the past few years switched to “mark-to-market” pension accounting to make it easier for investors to gauge plan performance.

With the switch, pension gains and losses flow into earnings sooner than under the old rules, which are still in effect and allow companies to smooth out the impact over several years. Companies that switch to valuing assets at up-to-date market prices may incur more volatility in their earnings, but it offers a more current picture of a pension plan’s health and its contribution to the bottom line.

In 2011 and 2012, that change hurt the companies’ earnings, largely because interest rates were falling at the time. But for 2013, it may be a big help to them, accounting experts said, a factor of the year’s surge in interest rates and strong stock-market performance.

“It’s going to account for a huge rise in operating earnings” at the affected companies, said Dan Mahoney, director of research at accounting-research firm CFRA.

Wall Street analysts tend not to include pension results in their earnings estimates, focusing instead on a company’s underlying businesses. That makes it hard for investors to know what the impact of the change will be. Some companies may not see a big impact at all, because of variations from company to company in how they’ve applied mark-to-market changes. (…)

Some mark-to-market companies with fiscal years ended in September have reported pension gains. Chemical maker Ashland Inc. had a $498 million pretax mark-to-market pension gain in its September-end fourth quarter, versus a $493 million pension loss in its fiscal 2012 fourth quarter. That made up about 40% of the Covington, Ky., company’s $1.24 billion in operating income for fiscal 2013. (…)

Not all mark-to-market companies will see gains. Some such companies record adjustments only if their pension gains or losses exceed a minimum “corridor.” As a result, Honeywell International Inc. says it doesn’t foresee a significant mark-to-market adjustment for 2013, and United Parcel Service Inc. has made similar comments in the past.

Moody’s adds: US Corporate Pension Funded Ratios Post Massive Increase in 2013

At year-end 2013, we estimate pension funding levels for our 50 largest rated US corporate issuers increased by 19 percentage points to 94% of pension obligations, compared with a year earlier. In dollar terms, this equates to $250 billion of decreased underfundings for these same issuers. We expect this reduction to be replicated across our entire rated universe. These improved funding levels will result in lower calls on cash, a credit positive.

Big Six U.S. Banks’ 2013 Profit Thwarted by Legal Costs

Combined profit at the six largest U.S. banks jumped last year to the highest level since 2006, even as the firms allocated more than $18 billion to deal with claims they broke laws or cheated investors.

A stock-market rally, cost cuts and a decline in bad loans boosted the group’s net income 21 percent to $74.1 billion, according to analysts’ estimates compiled by Bloomberg. That’s second only to 2006, when the firms reaped $84.6 billion at the peak of the U.S. housing bubble. The record would have been topped were it not for litigation and other legal expenses. (…)

The six banks’ combined litigation and legal expenses in the nine months rose 76 percent from a year earlier to $18.7 billion, higher than any annual amount since at least 2008. The costs increased at all the firms except Wells Fargo, where they fell 1.2 percent to $413 million, and Morgan Stanley (MS), which reported a 14 percent decline to $211 million. (…)

Legal costs that averaged $500 million a quarter could be $1 billion to $2 billion for a few years, Dimon told analysts in an Oct. 11 conference call. The firm is spending also $2 billion to improve compliance by the end of 2014, he said last month. (…)

VALUATION EXPANSION?

This is one of the main narratives at present, now that earnings multiples have expanded so much. The other popular narrative is the acceleration of the U.S. economy which would result in accelerating earnings, etc., etc… Here’s Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

It’s also possible valuations could continue to expand even if earnings growth doesn’t meet expectations. There is a direct link between valuation and the yield curve. A steep curve (long rates much higher than short rates); which we have at present and are likely to maintain; suggests better growth and easy monetary policy. This environment typically co-exists with rising valuation.

Low inflation is also supportive of higher multiples. Why? Earnings are simply more valuable when inflation is low; just like our earnings as workers are worth more when inflation is taking less of a bite out of them.

Lastly, as noted in BCA’s 2014 outlook report: In a liquidity trap, where interest rates reach the zero boundary, the linkage between monetary policy and the real economy is asset markets: zero short rates act to subsidize corporate profits, drive up asset prices and encourage risk-taking. Over time, higher asset values begin to stimulate stronger consumption and investment demand—the so-called “wealth effect.” We could be at the very early stages of a broad transition from strengthening asset values to better spending power by businesses and consumers. Global capital spending has begun to show signs of a rebound; while US consumers are beginning to borrow and spend again.

A few remarks on the above arguments:

imageThe yield curve can steepen if short-term rates decline or if long-term rates rise. The impact on equities can be very different. My sense is that the curve, which by the way is presently very steep by historical norms (chart from RBC Capital), could steepen some more for a short while but only through rising long-term yields. This is not conducive to much positive valuation expansion, especially if accompanied by rising inflation expectations which, normally, follow economic acceleration.

The next chart plots 10Y Treasury yields against the S&P 500 Index earnings yield (1/P/E). The relationship between the two is pretty obvious unless you only look at the last Fed-manipulated 5 years. Rising rates are not positive for P/E ratios.

image

Low inflation is indeed supportive of higher multiples as the Rule of 20 clearly shows. What is important for market dynamics is not the actual static level of inflation but the trend. Nirvana is when the economy (i.e. profits) accelerate while inflation remains stable or even declines. Can we reasonable expect nirvana in 2014?

The wealth effect was in fact Bernanke’s gambit all along. And it worked. But only for the top 20% of the U.S. population. What is needed now is employment growth. Can we get that without triggering higher inflation?

Miss Sonders reminds us that

This bull market is now the sixth longest in S&P 500 history (of 26 total bull markets). As of year end 2013, it’s run for 1,758 days, with the longest ending in 2000 at 4,494 days. It is the fourth strongest in history; up over 173% cumulatively as of year-end 2013.

Emerging Market Currencies Suffer as Dollar Rises

The South African rand sank to a fresh five-year low Thursday, as a rise in the dollar, fueled by strong U.S. jobs data, kept emerging market currencies under pressure.

The Turkish lira also suffered, closing in on its all-time low against the dollar reached earlier in the week. The rand and the lira are widely considered to be among the most vulnerable emerging market currencies, as both South Africa and Turkey are reliant on foreign investment flows to fund their wide current account deficits.

 
Share

NEW$ & VIEW$ (8 JANUARY 2014)

Companies in U.S. Added 238,000 Jobs in December, ADP Says

The 238,000 increase in employment was the biggest since November 2012 and followed a revised 229,000 gain in November that was stronger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The December tally exceeded the most optimistic forecast in a Bloomberg survey in which the median projection called for a 200,000 advance.

Discounts drive U.S. holiday retail growth: ShopperTrak

Promotions and discounts offered by U.S. retailers drove a 2.7 percent rise in holiday season sales despite six fewer days and a cold snap that kept shoppers from stores, retail industry tracker ShopperTrak said. (…)

U.S. online retail spending rose 10 percent to $46.5 billion in the November-December 2013 holiday season, according to comScore (SCOR.O). This was below the 14 percent growth that the data firm had forecast.

ShopperTrak said shoppers spent $265.9 billion during the latest holiday period. The increase was slightly ahead of the 2.4 percent jump it had forecast in September.

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

Both retail sales and foot traffic rose 2.5 percent in the 2012 holiday season. (…)

ShopperTrak estimated on Wednesday that U.S. retail sales would rise 2.8 percent in the first quarter of 2014, while shopper traffic would fall 9 percent.

Growth Picture Brightens as Exports Hit Record

A booming U.S. energy sector and rising overseas demand brightened the nation’s trade picture in November, sharply boosting estimates for economic growth in late 2013 and raising hopes for a stronger expansion this year.

U.S. exports rose to their highest level on record in November, a seasonally adjusted $194.86 billion, the Commerce Department said Tuesday. A drop in imports narrowed the trade gap to $34.25 billion, the smallest since late 2009.

Pointing up The trade figures led many economists to sharply raise their forecasts for economic growth in the final quarter. Morgan Stanley economists raised their estimate to an annualized 3.3% from an earlier forecast of a 2.4% pace. Macroeconomic Advisers boosted its fourth-quarter projection to a 3.5% rate from 2.6%.

Fourth-quarter growth at that pace, following a 4.1% annualized increase in the third quarter, would mark the fastest half-year growth stretch since the fourth quarter of 2011 and the first quarter of 2012.

The falling U.S. trade deficit in large part reflects rising domestic energy production. U.S. crude output has increased about 64% from five years ago, according to the U.S. Energy Information Administration.

At the same time, the U.S.’s thirst for petroleum fuels has stalled as vehicles become more efficient. As a result, refiners are shipping increasing quantities of diesel, gasoline and jet fuel to Europe and Latin America.

Petroleum exports, not adjusted for inflation, rose to the highest level on record in November while imports fell to the lowest level since November 2010.

If recent trade trends continue, Mr. Bryson said net exports could add one percentage point to the pace of GDP growth in the fourth quarter. That would be the biggest contribution since the final quarter of 2010.

Rising domestic energy production also helps in other ways, by creating jobs, keeping a lid on gasoline costs and lowering production costs for energy-intensive firms. As a result, consumers have more to spend elsewhere and businesses are more competitive internationally. (…)

U.S. exports are up 5.2% from a year earlier, led by rising sales to China, Mexico and Canada. U.S. exports to China from January through November rose 8.7% compared with the same period a year earlier. Exports to Canada, the nation’s largest trading partner, were up 2.5% in the same period. (…)

US inflation expectations hit 4-month high
Sales of Treasury inflation protected securities rise

Inflation expectations, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), have risen to 2.25 per cent from a low of around 2.10 a month ago.

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

(…) As the boomers get older, many will move out of the houses where they raised families and move into cozier apartments, condominiums and townhouses (known as multifamily units in industry argot). A normal transition for individuals, but a huge shift in the country’s housing demand.

Based on demographic trends, the country should see a stronger rebound in multifamily construction than in single-family construction, Kansas City Fed senior economist Jordan Rappaport wrote in the most recent issue of the bank’s Economic Review. (Though he also notes slowing U.S. population growth “will put significant downward pressure on both single-family and multifamily construction.”)

Construction of multifamily buildings is expected to pick up strongly by early 2014, and single-family-home construction should regain strength by early 2015. “The longer term outlook is especially positive for multifamily construction, reflecting the aging of the baby boomers and an associated shift in demand from single-family to multifamily housing. By the end of the decade, multifamily construction is likely to peak at a level nearly two-thirds higher than its highest annual level during the 1990s and 2000s,” Mr. Rappaport wrote.

In contrast, when construction of single-family homes peaks at the end of the decade or beginning of the 2020s, he wrote, it’ll be “at a level comparable to what prevailed just prior to the housing boom.” (…)

“More generally,” Mr. Rappaport wrote, “the projected shift from single-family to multifamily living will likely have many large, long-lasting effects on the U.S. economy. It will put downward pressure on single-family relative to multifamily house prices. It will shift consumer demand away from goods and services that complement large indoor space and a backyard toward goods and services more oriented toward living in an apartment. Similarly, the possible shift toward city living may dampen demand for automobiles, highways, and gasoline but increase demand for restaurants, city parks, and high-quality public transit. Households, firms, and governments that correctly anticipate these changes are likely to especially benefit.”

Euro-Zone Retail Sales Surge

A surprise jump in retail sales across the euro zone boosts hopes that consumers may aid the hoped-for recovery.

The European Union’s statistics agency Wednesday said retail sales rose by 1.4% from October and were 1.6% higher than in November 2012. That was the largest rise in a single month since November 2001, and a major surprise. Nine economists surveyed by The Wall Street Journal last week had expected sales to rise by just 0.1%.

image

The pickup was spread across the currency area, with sales up 1.5% in low-unemployment Germany, but up an even stronger 2.1% in France, where the unemployment rate is much higher and the economy weaker.

The rise in sales was also broadly based across different products, with sales of food and drink up 1.1% from October, while sales of other items were up 1.9%.

The surge in sales during November follows a long period of weakness, with sales having fallen in September and October. Consumer spending rose by just 0.1% on the quarter in the three months to September, having increased by a slightly less feeble 0.2% in the three months to June.

High five Let’s not get carried away. Sales often rebound after two weak months. Taking the last 3 months to November, totals sales rose only 0.4% or 1.6% annualized, only slightly better than the 0.8% annualized gain in the previous 3 months. Core sales did a little better with  annualized gains of 3.6% and 0.4% for the same respective periods. The most recent numbers can be revised, however.image

Markit’s Retail PMI for December was not conducive to much hoopla!

Markit’s final batch of eurozone retail PMI® data for 2013 signalled an overall decline in sales for the fourth month running. The rate of decline remained modest but accelerated slightly, reflecting a sharper contraction in France and slower growth in Germany.

Record-Low Core Inflation May Soon Push ECB to Ease Policy (Bloomberg Briefs)image

Meanwhile:

image

 

Auto U.K. Car Sales Top Pre-Crisis Levels

U.K. registrations of new cars rose 11% in 2013 to their highest level since before the 2008 financial crisis, reflecting the country’s relatively strong economic recovery in contrast with the rest of Europe, where car demand has revived only recently from a prolonged slump.

The outlook is nonetheless for more sedate growth in the U.K. this year and next as the impact of pent-up demand for new cars fades, the U.K. Society of Motor Manufacturers and Traders, or SMMT, said on Tuesday.

Much of the increase in sales last year stemmed from the generous provision of cheap financing from the car manufacturers.

The SMMT said registrations, which mirror sales, rose to 2.26 million vehicles from 2.04 million in 2012, with registrations in December jumping 24% to 152,918, a 22nd consecutive monthly rise.

As a result, the U.K. has entrenched its position as Europe’s biggest car market after Germany and ahead of France. Germany registrations of new cars fell 4.2% to 2.95 million in 2013, despite a 5.4% gain in December. French registrations fell 5.7% last year to 1.79 million cars, although they rose 9.4% in December. The German and French data were released by the countries’ auto-making associations last week. (…)

Eurozone periphery borrowing costs fall
Yields in Spain, Portugal and Greece down after Irish bond sale

(…) The strength of demand for eurozone “periphery” debt reflected increased investor appetite for higher-yielding government bonds as well as rising confidence in the creditworthiness of eurozone economies. It improved significantly the chances of Portugal following Ireland’s example and exiting its bailout programme later this year – and of Greece also soon being able to tap international debt markets. (…)

EARNINGS WATCH

Currency Swings Hit Earnings Currency swings are still taking a toll on corporate earnings despite efforts to manage the risk. Large U.S. multinational companies reported about $4.2 billion in hits to earnings and revenue in Q3, driven mostly by swings in the Brazilian real, Japanese yen, Indian rupee and Australian dollar, CFOJ’s Emily Chasan reports. The real declined 10% against the U.S. dollar during the quarter, while the rupee hit a record low.

A total of 205 companies said currency moves had negatively affected their results in the third quarter of 2013, according to FiREapps, a foreign exchange risk-management company. “More companies are trying to manage risk…but companies are still seeing highly uncorrelated moves [against the dollar] based on swings in one currency,” said FiREapps CEO Wolfgang Koester. Companies have spent much of the year insulating themselves against big moves in the euro or the yen, but swings in the Australian dollar, rupee and real dominated discussions because they were often surprises, Mr. Koester said.

Only 78 companies quantified the impact of currencies, which translated to about 3 cents a share on average. The total was up slightly from the second quarter when 95 companies reported a total impact of $4.1 billion.

On an industry basis, car makers suddenly started disclosing more currency moves during the quarter, with 16 companies mentioning their results had been affected. Ford, for example, warned last month of the potential impact from an expected Venezuelan currency devaluation in 2014.

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

Wall Street analysts have gotten back to work in the new year with a flurry of ratings changes, and they have been more bearish than bullish.  As shown in the first chart below, there have been 226 total ratings changes over the first four trading days of 2014, which is the highest reading seen since the bull market began in 2009.  We have seen 134 analyst downgrades since the start of the year, which is also the highest level seen over the first four trading days since 2009.  

In percentage terms, 2014 is starting with fewer downgrades than in 2011 or 2012 (62.7% and 60.0% respectively vs. 59.2% in 2014), but these years both had very quiet starts in terms of the total number of ratings changes.  

Record-Setting Cold Hits Eastern U.S.

A record-setting cold snap in the Midwest enveloped the eastern half of the country Tuesday, with brutally cold temperatures recorded from the deep South up to New England.

Pointing up Is China About to Let the Yuan Rise? Don’t Bank on It  China’s central bankers are beginning to think the country’s huge pile of reserves – which is still growing as authorities intervene to keep the yuan from rising too fast — is excessive. Curbing its growth could even help the economy’s transition from an export-led model to one based on domestic consumption. But the top leadership’s fear of social unrest means things are unlikely to change soon.

(…) In an effort to hold down the value of its currency and keep Chinese exports competitive, the PBOC wades into markets, buying up foreign exchange and pumping out yuan on a massive scale. The PBOC probably bought $73 billion dollars of foreign exchange in October, the most in three years, and a similar amount in November, according to Capital Economics.

Even before that, official figures showed China’s reserves had hit a record $3.66 trillion by the end of the third quarter, the bulk of it invested in U.S. dollar securities like Treasury bonds. Policymakers are beginning to wonder if that hoard is too big.

Sitting on $4 trillion might not seem like a bad position to be in, but it can make a mess of domestic monetary policy if those reserves result from the central bank’s attempts to deal with capital inflows.

To prevent the yuan from appreciating, the PBOC buys up foreign exchange using newly created domestic currency. But that can fuel domestic inflation, so the central bank “sterilizes” the new money by selling central bank bills to domestic financial institutions. That leaves these institutions with less cash for lending, pushing up domestic interest rates (and ultimately leaving the central bank with a loss on its balance sheet).

Interest rates in China already are significantly higher than in many other countries, making it a tempting target for speculative “hot money” flows, which tend to find a way in despite the country’s capital controls.

“Monetary policy gets into a conundrum,” said Louis Kuijs, an economist at RBS. “If the central bank is intervening because there are huge capital inflows, the domestic interest rate in the market will go up. The more that interest rate goes up, the more capital will be attracted. It becomes difficult for the central bank to manage.”

Yi Gang, head of the State Administration of Foreign Exchange and guardian of the treasure trove, thinks the reserves are so large they’re becoming more of a burden than an asset. In an interview last month, he told financial magazine Caixin that a further build-up would bring “fewer and fewer benefits coupled with higher and higher costs.”

Those costs include not just losses on sterilization operations but also the impact of a huge export sector on the environment, he said.

But Mr. Yi does not make the decisions, any more than his boss, PBOC Gov. Zhou Xiaochuan, has the final say on interest rates. Monetary policy in China is too big a deal to be left to the central bank; the State Council, headed by Premier Li Keqiang, has to sign off on its decisions.

The technocrats at the PBOC, financial professionals who have as much faith in markets as anyone in China’s government, might want to dial back foreign-exchange intervention. But the top leaders are leery of any move that could pose a risk to employment. If factories go out of business and jobless migrants flood the streets of Guangdong, a market-determined exchange rate will be little comfort.

To be sure, China is allowing the yuan to appreciate — just not by much. The yuan has risen nearly 13% against the U.S. dollar since authorities relaxed the currency peg in June 2010, including 3% appreciation last year. But that’s far less than it would likely rise if the market were allowed to operate freely.

Never mind that a cheap currency makes it more expensive for Chinese households and businesses to buy things from the outside world, depressing standards of living and hampering the transition to a consumer society that China’s leaders ostensibly want. The policy amounts to forced saving on a huge scale — even as the officials who manage those savings say they already have more than enough for any contingency.

Some experts think the pace of China’s FX accumulation will even increase. Capital Economics says the PBOC could amass another $500 billion over the next year. That’s what they think it will take to keep the yuan from rising to more than 5.90 to the dollar, compared with 6.10 now.

“The PBOC will have to choose between allowing significant currency appreciation and continuing to accumulate foreign assets,” Mark Williams, the firm’s chief Asia economist, wrote in a research note Monday. “We expect policymakers to opt primarily for the latter.”

Emerging Markets See Selloff

The declines come amid concerns about faltering economies and political unrest.

Investors are bailing out of emerging markets from Turkey and Brazil to Thailand and Indonesia, extending a selloff that began last year, amid concerns about faltering economies and political unrest.

The MSCI Emerging Markets Index, a gauge of stocks in 21 developing markets, slipped 3.1% in the first four trading days of 2014, building on a 5% loss in 2013. This compares with double-digit-percentage rallies in stock markets in the U.S., Japan and Europe last year.

Indonesia’s currency on Tuesday hit its lowest level against the dollar since the financial crisis in Asia trading. Meanwhile, the Turkish lira plumbed record lows against the greenback this week. (…)

In the first three trading days of the year, investors yanked $1.2 billion from the Vanguard FTSE Emerging Markets ETF, VFEM.LN +0.07% the biggest emerging-markets exchange-traded fund listed in the U.S., according to data provider IndexUniverse. That is among the biggest year-to-date outflows among all ETFs. Shares of the ETF itself are down 4.2% in 2014.

Last year, money managers pulled $6 billion from emerging-market stocks, the most since 2011, according to data tracker EPFR Global. Outflows from bond markets totaled $13.1 billion, the biggest since the financial crisis of 2008. (…)

The stocks in the MSCI Emerging Markets Index on average are trading at 10.2 times next year’s earnings, compared with a P/E of 15.2 for the S&P 500, FactSet noted. (…)

In the Philippines, an inflation reading on Tuesday reached a two-year high and provided another sell signal to currency traders given officials and economists had expected the impact from the typhoon in November to be mild on inflation. The Philippine peso has weakened 1% against the dollar since the start of the year. (…)

Mohamed El-Erian
Do not bet on a broad emerging market recovery

(…) To shed more light on what happened in 2013 and what is likely to occur in 2014, we need to look at three factors that many had assumed were relics of the “old EM”.

First, and after several years of large inflows, emerging markets suffered a dramatic dislocation in technical conditions in the second quarter of 2013.

The trigger was Fed talk of “tapering” the unconventional support the US central bank provides to markets. The resulting price and liquidity disruptions were amplified by structural weaknesses associated with a narrow EM dedicated investor base and skittish cross-over investors. Simply put, “tourist dollars” fleeing emerging markets could not be compensated for quickly enough by “locals”.

Second, 2013 saw stumbles on the part of EM corporate leaders and policy makers. Perhaps overconfident due to all the talk of an emerging market age – itself encouraged by the extent to which the emerging world had economically and financially outperformed advanced countries after the 2008 global financial crisis – they underestimated exogenous technical shocks, overestimated their resilience, and under-delivered on the needed responses at both corporate and sovereign levels. Pending elections also damped enthusiasm for policy changes.

Finally, the extent of internal policy incoherence was accentuated by the currency depreciations caused by the sudden midyear reversal in cross-border capital flows. Companies scrambled to deal with their foreign exchange mismatches while central bank interest rate policies were torn between battling currency-induced inflation and countering declining economic growth.

Absent a major hiccup in the global economy – due, for example, to a policy mistake on the part of G3 central banks and/or a market accident as some asset prices are quite disconnected from fundamentals – the influence of these three factors is likely to diminish in 2014. This would alleviate pressure on emerging market assets at a time when their valuations have become more attractive on both a relative and absolute basis.

Yet the answer is not for investors to rush and position their portfolios for an emerging market recovery that is broad in scope and large in scale. Instead, they should differentiate by favouring companies commanding premium profitability and benefiting from healthy long-run consumer growth dynamics, residing in countries with strong balance sheets and a high degree of policy flexibility, and benefiting from a rising dedicated investor base.

 
Share

NEW$ & VIEW$ (7 JANUARY 2014)

Weaker Than Expected ISM Services

Monday’s ISM Services report for December came in weaker than expected.  While economists were expecting the headline reading to come in at a level of 54.5, the actual reading was a bit weaker at 53.0.  Taking both the ISM Manufacturing and Non Manufacturing reports and accounting for their size in the overall economy, the combined reading for December fell to 53.5.

Sad smile Slumping new orders and backlog! First contraction in new orders since July 2009.

U.S. Rents Rise as Market Tightens

Nationwide, landlords raised rents by an average of 0.8% to $1,083 a month in the quarter, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. While that is below the previous quarter’s 1% increase, it is above the 0.6% gain seen in 2012′s final quarter. Rents climbed 3.2% for all of 2013.

The vacancy rate, meantime, fell to 4.1% in the fourth quarter from 4.6% in the year-earlier quarter, remaining well below the 8% peak at the end of 2009. (…)

Nearly 42,000 units were completed in the fourth quarter, the most since the fourth quarter of 2003, and about 127,000 for all of 2013, according to Reis. (…)

In 2014, completions should total more than 160,000 apartments, roughly one-third more than the long-term historical average, according to Reis. That could cause the national vacancy rate to rise slightly for the first time since 2009.

CoStar Group, another real-estate research firm, predicts new-apartment supply will peak this year at 220,000, but an additional 350,000 units will hit the nation’s 54 largest markets in 2015 and 2016 combined. (…)

Euro-Zone Inflation Rate Slips

The European Union’s statistics agency Tuesday said a preliminary reading showed consumer prices in the 17 countries that then shared the euro rose by just 0.8% over the 12 months to December, a decline in the annual rate of inflation from 0.9% in November.

After stripping out prices for food and energy, which tend to be more volatile, prices rose by just 0.7% in the 12 months to December—the lowest rate of “core” inflation since records began in January 2001. That suggests that weak domestic demand is becoming an increasingly significant source of disinflationary pressure, adding to the impact from falling world energy prices and the end of a period of administered price rises as governments sought to repair their finances by increasing revenue from sales taxes and charging more for services such as health care. (…)

Separate figures from Eurostat suggested consumer prices are unlikely to rise sharply in coming months. The agency said the price of goods leaving factory gates in November fell for the second straight month, although by just 0.1%.

Slump in Trading Threatens Profit Engine

The trading boom that helped reshape global investment banks over the past decade is sputtering, raising fears that one of Wall Street’s biggest profit engines is in peril.

(…) Executives have warned that lackluster markets could lead to year-over-year declines in fixed-income, commodities and currency trading revenue when banks begin reporting fourth-quarter results next week. That would mark the fourth consecutive drop and the 11th in the past 16 quarters.

Few corners of banks’ trading operations have escaped the slump. A 10-year commodities rally has fizzled, while foreign-exchange trading volume has fallen sharply from its 2008 peak. Since the financial crisis, investors have eschewed exotic fixed-income securities in favor of low-risk government bonds, which are less profitable for banks, and overall trading volumes have dipped.

A rash of new regulations, meanwhile, have prompted Wall Street firms to exit from once-lucrative businesses such as energy trading and storing and transporting physical commodities.

The slump has gone on so long that some observers are beginning to question whether it is part of an ordinary down cycle or a more permanent shift. (…)

FRENCH PMIS DISAPPOINT ONCE MORE

The French Manufacturing PMI fell for the third consecutive month in December to 47.0. It has been stuck below the neutral 50 level for almost two years. On this measure, the French manufacturing sector is the weakest in the Eurozone by some margin. Even the Greek manufacturing PMI improved slightly last month, from 49.2 to 49.6. Official surveys of the French economy paint a somewhat brighter picture. According to a survey by the French statistical agency, Insee, business manager’s perceptions of the overall business climate improved by 2 points to 100 in December, in line with the historic average.

France continues to suffer from declining competitiveness, both in absolute terms and relative to its Eurozone competitors. According to IMF estimates of the real effective exchange rate, the competitiveness of the French manufacturing sector has deteriorated by 12% against Germany since the debt crisis hit in 2010. Over the same period, it has fallen much further against those countries that have experienced deflation. For example, French competitiveness has declined by 28% against Ireland, and by 23% against Greece. Our central view is that France will continue to disappoint through 2014, with growth around zero – the Consensus is looking for something closer to 1%. Risks to our central view are to the downside.

COTW_0106

GOOD READ

Great dollar rally of 2014 as Fukuyama’s History returns in tooth and claw China and Japan are on a quasi-war footing, one misjudgement away from a chain of events that would shatter all economic assumptions (By Ambrose Evans-Pritchard  Tks Fred!)

We enter the year of the all-conquering US dollar. As the global security system unravels – with echoes of 1914 – the premium on the world’s safe-haven currency must rise.

The effect is doubly powerful since the US economy is simultaneously coming back to life. America has shaken off the most drastic fiscal tightening since the Korean War, thanks to quantitative easing. Growth is near “escape velocity” – at least for now – at a time when half of Europe is still trapped in semi-slump and China is trying to cool the world’s most dangerous credit boom.

As the Fed turns off the spigot of dollar liquidity, it will starve the world’s dysfunctional economy of $1 trillion a year of stimulus. This will occur through the quantity of money effect, hitting in a series of hammer blows, regardless of whether interest rates remain at zero. The Fed denies that this is “tightening”, and I have an ocean-front property to sell you in Sichuan.

It is hard to imagine a strategic and economic setting more conducive to a blistering dollar rally, a process that will pick up speed as yields on 10-year US Treasuries break through 3pc. (…)

In case you had forgotten, China has imposed an Air Defence Indentification Zone (ADIC) covering the Japanese-controlled Senkaku islands. The purpose of this escalation in the East China Sea is to test US willingness to back its military alliance with Japan, just as Kaiser Wilhelm provoked seemingly petty disputes with France to test Britain’s response before the First World War.

The ploy has been successful. The US has wobbled, wisely or not depending on your point of view. While American airlines comply, Japanese airlines fly through defiantly under orders from Japan’s leader Shinzo Abe. Mr Abe has upped the ante by visiting Tokyo’s Yasukuni Shrine – the burial place of war-time leader Tojo – in a gesture aimed at Beijing.

Asia’s two great powers are on a quasi-war footing already, one misjudgement away from a chain of events that would shatter all economic assumptions. It would leave America facing an invidious choice: either back Japan, or stand aloof and let the security structure of East Asia disintegrate. (…)

The US is stepping back from the Middle East, leaving the region to be engulfed by a Sunni-Shia conflict that resembles Europe’s Thirty Years War, when Lutherans and Catholics battled for supremacy. Sunni allies are being dropped, Shia Iran courted. Even Turkey risks succumbing, replicating Syria’s sectarian fault lines. (…)

In Europe, the EU Project has by now lost so much caste that Ukraine’s leaders dare to tear up an association accord, opting instead for a quick $15bn from Vladimir Putin’s Russia. (…)

So with that caveat let me try to make sense of global economic forces. Bearish as usual, I doubt that we are safely out of the woods, let alone on the start of a fresh boom. How can it be if the global savings rate is still rising, expected to hit a fresh record of 25.5pc this year? There is still a chronic lack of consumption.

As the Fed tightens under a hawkish Janet Yellen, a big chunk of the $4 trillion of foreign capital that has flowed into emerging markets since 2009 will come out again. It is fickle money, late to the party. (…)

Euroland will be hit on two fronts by Fed action. Bond yields will ratchet up, shackled to US Treasuries. Emerging market woes will ricochet into the eurozone. The benefits of US recovery will not leak out as generously as in past cycles. Dario Perkins from Lombard Street Research says the US is now more competitive than at any time since the Second World War. America is poised to meet its own consumption, its industries rebounding on cheap energy. Europe will have to generate its own stimulus this time. Don’t laugh. (…)

Credit to firms is still contracting at a rate of 3.7pc, or 5.2pc in Italy, 5.9pc in Portugal and 13.5pc in Spain. This is not deleveraging. The effects have been displaced onto public debt, made worse by near deflation across the South.

Italy’s debt has risen from 119pc to 133pc of GDP in three years despite a primary surplus, near the danger line for a country with no sovereign currency. For all the talk of reform – Orwellian EMU-speak for austerity – Italy is digging itself deeper into one hole even as it claws itself out of another, its industries relentlessly hollowed out. Much the same goes for Portugal and, increasingly, France. (…)

There is just enough growth on offer this year – the ECB says 1pc – to sustain the illusion of recovery. Those in control think they have licked the crisis, citing Club Med current account surpluses. Victims know this feat is mostly the result of crushing internal demand. They know too that job wastage is eroding skills (hysteresis) and blighting their future. Yet they dare not draw their swords.

It will take politics – not markets – to break this bad equilibrium, the moment when democracies cease to tolerate youth unemployment of 58pc in Greece, 57.4pc in Spain, 41.2pc in Italy and 36.5pc in Portugal.

Unemployment in the eurozone (yellow), US (red) and Japan (light blue)

The European elections in May will be an inflexion point. A eurosceptic landslide by Marine Le Pen’s Front National, Holland’s Freedom Party, Italy’s Cinque Stelle and Britain’s UKIP, among others, will puncture the sense of historic inevitability that drives the EU Project. (…)

Over all else hangs the fate of China. The sino-bubble is galactic. Credit has grown from $9 trillion to $24 trillion since late 2008, as if adding the US and Japanese banking systems combined. The pace of loan growth – 100pc of GDP over five years – is unprecedented in any major economy, eclipsing the great boom-bust dramas of the past century.

The central bank is struggling to deflate this gently, with two spasms of credit stress in the past six months. I doubt it will prove any more adept than the Bank of Japan in 1990, or the Fed in 1928, and again in 2007. This will be a bumpy descent.

China may try to cushion any hard-landing by driving down the yuan. The more that Mr Abe forces down the Japenese yen, the more likely that China will counter with its own devaluation to protect the margins of it manufacturing industry. We may be on the brink of another East Asian currency war, a replay of 1998 but this time on a much bigger scale and with China playing a full part.

If so, this will transmit an a further deflationary shock through the global system, catching the West sleeping with its defences against deflation already run down. The US may be strong enough to cope. For Europe it would be fatal. The denominator effect would push Club Med into a debt compound spiral. Let us give it a 30pc probability. Happy new year.

 
Share

NEW$ & VIEW$ (31 DECEMBER 2013)

Smile Small Businesses Anticipate Breakout Year Ahead

(…) Of 937 small-business owners surveyed in December by The Wall Street Journal and Vistage International, 52% said the economy had improved in 2013, up from 36% a year ago. Another 38% said they expect conditions to be even better in 2014, up from 27%.

Three out of four businesses said they expect better sales in 2014, and overall, the small business “confidence index”—based on business owners’ sales expectations, spending and hiring plans—hit an 18-month high of 108.4 in December. All respondents, polled online from Dec. 9 to Dec. 18, had less than $20 million in annual revenue and most had less than 500 employees.

According to the latest data from the National Federation of Independent Business, a Washington lobby group, small-business owners in November ranked weak sales below taxes and red tape as their biggest headache, for the first time since June 2008.

In the group’s most recent survey, owner sentiment improved slightly in November but was still dismal compared with pre-2007. (…)

U.S. Pending Home Sales Inch Up

The National Association of Realtors said Monday that its seasonally adjusted index of pending sales of existing homes rose 0.2% in November from the prior month to 101.7. The index of 101.7 is against a benchmark of 100, which is equal to the average level of activity in 2001, the starting point for the index.

The November uptick was the first increase since May when the index hit a six-year high, but it was less than the 1% that economists had forecast.

Pointing up The chart in this next piece may be the most important chart for 2014. I shall discuss this in more details shortly.

Who Wins When Commodities Are Weak? Developed economy central bankers were somewhat lauded before the financial crisis. Recently, though, they’re finding it harder to catch a break.

(…) Still, here’s a nice chart from which they might take some solace.  Compiled by Barclays Research it shows the gap between headline and core consumer price inflation across Group of Seven nations, superimposed on the International Monetary Fund’s global commodities index. As can be seen at a glance, the correlation is fairly good, showing, as Barclays says, the way commodity prices can act as a ‘tax’ on household spending power.

During 2004-08, that tax was averaging a hefty 0.8 percentage points a year in the G7,  quite a drag on consumption (not that that was necessarily a bad thing, looking back, consumption clearly did OK). However, since 2008. it has averaged just 0.1 percentage points providing some rare relief to the western consumer struggling with, fiscal consolidation, weak wage growth and stubbornly high rates of joblessness.

So, what’s the good news for central bankers here? Well, while a deal with Iran inked in late November to ease oil export sanctions clearly isn’t going to live up to its initial billing, at least in terms of lowering energy prices, commodity-price strength generally is still bumping along at what is clearly a rather weak historical level.

And the consequent very subdued inflation outlook in the U.S. and euro area means that central banks there can continue to fight on just one front, and focus on delivering stronger growth and improved labor market conditions.

Of course, weak inflation expectations can tell us other things too, notably that no one expects a great deal of growth, or upward pressure on wages. Moreover, as we can also see from the chart, the current period of commodity price stability is a pretty rare thing. Perhaps neither central bankers or anyone else should get too used to it.

Coffee cup  Investors Brace as Coffee Declines

Prices have tumbled 20% this year, capping the biggest two-year plunge in a decade and highlighting commodity markets’ struggle with a supply deluge.

(…) The sharp fall in coffee prices is the most prominent example of the oversupply situation that has beset many commodity markets, weighing on prices and turning off investors. Mining companies are ramping up production in some copper mines, U.S. farmers just harvested a record corn crop, and oil output in the U.S. is booming. The Dow Jones-UBS Commodity Index is down 8.6% year to date.

In the season that ended Sept. 30, global coffee output rose 7.8% to 144.6 million bags, according to the International Coffee Organization. A single bag of coffee weighs about 60 kilograms (about 132 pounds), an industry standard. Some market observers believe production could rise again in 2014. (…)

The U.S. Department of Agriculture forecasts that global coffee stockpiles will rise 7.5% to 36.3 million bags at the end of this crop year, an indication that supplies are expected to continue to outstrip demand in the next several months. (…)

The global coffee glut has its roots in a price rally more than three years ago. Farmers across the world’s tropical coffee belt poured money into the business, spending more on fertilizer and planting more trees as prices reached a 14-year high above $3 a pound in May 2011.(…)

Americans on Wrong Side of Income Gap Run Out of Means to Cope

As the gap between the rich and poor widened over the last three decades, families at the bottom found ways to deal with the squeeze on earnings. Housewives joined the workforce. Husbands took second jobs and labored longer hours. Homeowners tapped into the rising value of their properties to borrow money to spend.

Those strategies finally may have run their course as women’s participation in the labor force has peaked and the bursting of the house-price bubble has left many Americans underwater on their mortgages.

“We’ve exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama’s Council of Economic Advisers. “They weren’t sustainable.”

The result has been a downsizing of expectations. By almost two to one — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to the latest Bloomberg National Poll. The lack of faith is especially pronounced among those making less than $50,000 a year, with close to three-quarters in the Dec. 6-9 survey saying the economy is unfair. (…)

The diminished expectations have implications for the economy. Workers are clinging to their jobs as prospects fade for higher-paying employment. Households are socking away more money and charging less on credit cards. And young adults are living with their parents longer rather than venturing out on their own.

In the meantime, record-high stock prices are enriching wealthier Americans, exacerbating polarization and bringing income inequality to the political forefront. (…)

The disparity has widened since the recovery began in mid-2009. The richest 10 percent of Americans earned a larger share of income last year than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution made at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

(…) The median income of men 25 years of age and older with a bachelor’s degree was $56,656 last year, 10 percent less than in 2007 after taking account of inflation, according to Census data.(…)

Those less well-off, meanwhile, are running out of ways to cope. The percentage of working-age women who are in the labor force steadily climbed from a post-World War II low of 32 percent to a peak of 60.3 percent in April 2000, fueling a jump in dual-income households and helping Americans deal with slow wage growth for a while. Since the recession ended, the workforce participation rate for women has been in decline, echoing a longer-running trend among men. November data showed 57 percent of women in the labor force and 69.4 percent of men. (…)

Households turned to stepped-up borrowing to help make ends meet, until that avenue was shut off by the collapse of house prices. About 10.8 million homeowners still owed more money on their mortgages than their properties were worth in the third quarter, according to Seattle-based Zillow Inc.

The fallout has made many Americans less inclined to take risks. The quits rate — the proportion of Americans in the workforce who voluntarily left their jobs — stood at 1.7 percent in October. While that’s up from 1.5 percent a year earlier, it’s below the 2.2 percent average for 2006, the year house prices started falling, government data show.

Millennials — adults aged 18 to 32 — are still slow to set out on their own more than four years after the recession ended, according to an Oct. 18 report by the Pew Research Center in Washington. Just over one in three head their own households, close to a 38-year low set in 2010. (…)

The growing calls for action to reduce income inequality have translated into a national push for a higher minimum wage. Fast-food workers in 100 cities took to the streets Dec. 5 to demand a $15 hourly salary. (…)

Cold Temperatures Heat Up Prices for Natural Gas

2013 by the Numbers: Bitter cold and tight supplies have helped spur a 32% rise in natural-gas futures so far this year, making it the year’s top-performing commodity.

(…) Not only are colder-than-normal temperatures spurring households and businesses to consume more of the heating fuel, the boom in U.S. output is starting to level off as well. These two factors are shrinking stockpiles and lifting prices. The amount of natural gas in U.S. storage declined by a record 285 billion cubic feet from the previous week and stood 7% below the five-year average in the week ended Dec. 13, according to the Energy Information Administration. (…)

Over the first 10 days of December, subzero temperatures in places such as Chicago and Minneapolis helped boost gas-heating demand by 37% from a year ago, the largest such gain in at least 14 years, according to MDA Weather Services, a Gaithersburg, Md., forecaster.

MDA expects below-normal temperatures for much of the nation to continue through the first week of January.

Spain retail sales jump 1.9 percent in November

- Spain retail sales rose 1.9 percent year-on-year on a calendar-adjusted basis in November, National Statistics Institute (INE) reported on Monday, after registering a revised fall of 0.3 percent in October.

Retail sales had been falling every month for three years until September, when they rose due to residual effects from the impact of a rise in value-added tax (VAT) in September 2012.

Sales of food, personal items and household items all rose in November compared with the same month last year, and all kinds of retailers, from small chains to large-format stores, saw stronger sales, INE reported.

High five Eurozone retail sales continue to decline in December Surprised smile Ghost

image_thumb[5]Markit’s final batch of eurozone retail PMI® data for 2013 signalled an overall decline in sales for the fourth month running. The rate of decline remained modest but accelerated slightly, reflecting a sharper contraction in France and slower growth in Germany.

The overall decline would have been stronger were it not for a marked easing the rate of contraction in Italy, where the retail PMI hit a 33-month high.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, fell back to 47.7 in December, from 48.0 in November. That matched October’s five-month low and indicated a moderate decline in sales. The average reading for the final quarter (47.8) was lower than in Q3 (49.5) but still the second-highest in over two years.

image_thumb[4]Retail sales in Germany rose for the eighth month running in December, but at the weakest rate over this sequence. Meanwhile, the retail downturn in France intensified, as sales fell for the fourth successive month and at the fastest pace since May. Retail sales in France have risen only twice in the past 21 months. Italy continued to post the sharpest decline in sales of the three economies, however, despite seeing a much slower fall in December. The Italian retail PMI remained well below 50.0 but rose to a 33-month high of 45.3, and the gap between it and the German retail PMI was the lowest in nearly three years.

Retail employment in the eurozone declined further in December, reflecting ongoing job shedding in France and Italy. The overall decline across the currency area was the steepest since April. German retailers expanded their workforces for the forty third consecutive month.

EARNINGS WATCH

Perhaps lost among the Holidays celebrations, Thomson Reuters reported on Dec. 20 that

For Q4 2013, there have been 109 negative EPS preannouncements issued by S&P 500 corporations compared to 10 positive EPS preannouncements. By dividing 109 by 10, one arrives at an N/P ratio of 10.9 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Strangely, this is what they reported On Dec. 27:

For Q4 2013, there have been 108 negative EPS preannouncements issued by S&P 500 corporations compared to 11 positive EPS preannouncements.

Hmmm…things are really getting better!

On the other hand, the less volatile Factset’s tally shows no deterioration in negative EPS guidance for Q4 at 94 while positive guidance rose by 1 to 13.

The official S&P estimates for Q4 were shaved another $0.06 last week to $28.35 while 2014 estimates declined 0.3% from $122.42 to $122.11. Accordingly, trailing 12-months EPS should rise 5.1% to $107.40 after Q4’13.

Factset on cash flows and capex:

S&P 500 companies generated $351.3 billion in free cash flow in Q3, the second largest amount in at least ten years. This amounted to 7.2% growth year-over-year, and, as a result of slower growth in fixed capital expenditures (+2.2%), free cash flow (operating cash flow less fixed capital expenditures) grew at a higher rate of 11.3%. Free cash flows were also at their second highest quarterly level ($196.8 billion) in Q3.

S&P 500 fixed capital expenditures (“CapEx”) amounted to $155.0 billion in Q3, an increase of 2.2%. This marks the third consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Because the Energy sector’s CapEx spending represented over a third of the S&P 500 ex-Financials total, its diminished spending (-1.6% year-over-year) has had a great impact on the overall growth rate.

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 6.1% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit a 13.7% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales were above the ten-year average.

image_thumb[1]

Going forward, however, analysts are projecting that the CapEx growth rate will slide, as the projected growth for the next twelve months of 3.9% is short of that of the trailing twelve-month period. In addition, growth for capital expenditures is expected to continue to slow in 2014 (+1.6%) due, in part, to negative expected growth rates in the Utilities (-3.2%) and Telecommunication Services (-3.0%) sectors.

Gavyn Davies The three big macro questions for 2014

1. When will the Fed start to worry about supply constraints in the US?

(…) The CBO estimates that potential GDP is about 6 percent above the actual level of output. This of course implies that the Fed could afford to delay the initial rise in short rates well beyond the 2015 timescale that the vast majority of FOMC participants now deem likely. The very low and falling rates of inflation in the developed world certainly support this.

But the suspicion that labour force participation, and therefore supply potential, may have been permanently damaged by the recession is gaining ground in some unexpected parts of the Fed, and the unemployment rate is likely to fall below the 6.5 percent threshold well before the end of 2014 (see Tim Duy’s terrific blog on this here)This is the nub of the matter: will Janet Yellen’s Fed want to delay the initial rate rise beyond the end of 2015, and will they be willing to fight the financial markets whenever the latter try to price in earlier rate hikes, as they did in summer 2013? I believe the answer to both these questions is “yes”, but there could be several skirmishes on this front before 2014 is over. Indeed, the first may be happening already.

2. Will China bring excess credit growth under control?

Everyone now agrees that the long run growth rate in China has fallen from the heady days when it exceeded 10 per cent per annum, but there are two very different views about where it is headed next. The optimistic version, exemplified by John Ross’ widely respected blog, is that China has been right to focus on capital investment for several decades, and that this will remain a successful strategy. John points out that, in order to hit the official target of doubling real GDP between 2010 and 2020, growth in the rest of this decade can average as little as 6.9 per cent per annum, which he believes is comfortably within reach, while the economy is simultaneously rebalanced towards consumption. This would constitute a very soft landing from the credit bubble.

The pessimistic view is well represented by Michael Pettis’ writing, which has been warning for several years that the re-entry from the credit bubble would involve a prolonged period of growth in the 5 per cent region at best. Repeated attempts by the authorities to rein in credit growth have had to be relaxed in order to maintain GDP growth at an acceptable rate, suggesting that there is a conflict between the authorities’ objective to allow the market to set interest rates, and the parallel objective to control the credit bubble without a hard landing.

As I argued recently, there is so far no sign that credit growth has dropped below the rate of nominal GDP growth, and the bubble-like increases in housing and land prices are still accelerating. The optimistic camp on China’s GDP has been more right than wrong so far, and a prolonged soft landing still seems to be the best bet, given China’s unique characteristics. But the longer it takes to bring credit under control, the greater the chance of a much harder landing.

3. Will the ECB confront the zero lower bound?

Whether it should be described as secular stagnation or Japanification, the euro area remains mired in a condition of sluggish growth and sub-target inflation that will be worsened by the latest bout of strength in the exchange rate. Mario Draghi said this week that

We are not seeing any deflation at present… but we must take care that we don’t have inflation stuck permanently below one percent and thereby slip into the danger zone.

This does not seem fully consistent with the ECB’s inflation target of “below but close to 2 per cent”. Meanwhile, the Bundesbank has just published a paper which confidently denies that there is any risk of deflation in the euro area, and says that declining unit labour costs in the troubled economies are actually to be welcomed as signs that the necessary internal rebalancing within the currency zone is taking place.

The markets will probably be inclined to accept this, as long as the euro area economy continues to recover. This seems likely in the context of stronger global growth.

But a further rise in the exchange rate could finally force the ECB to confront the zero lower bound on interest rates, as the Fed and others have done in recent years. Mr Draghi has repeatedly shown that he has the ability to navigate the tricky politics that would be involved here, but a pre-emptive strike now seems improbable. In fact, he might need a market crisis to concentrate some minds on the Governing Council.

So there we have the three great issues in global macro, any one of which could take centre stage in the year ahead. For what it is worth, China currently seems to me by far the most worrying.

SENTIMENT WATCH

Goldman’s Top Economist Just Answered The Most Important Questions For 2014 — And Boy Are His Answers Bullish

Goldman Sachs economist Jan Hatzius is out with his top 10 questions for 2014 and his answers to them. Below we quickly summarize them, and provide the answers.

1. Will the economy accelerate to above-trend growth? Yes, because the private sector is picking up, and there’s going to be very little fiscal drag.

2. Will consumer spending improve? Yes, because real incomes will grow, and the savings rate has room to decline.

3. Will capital expenditures rebound? Yes, because nonresidential fixed investment will catch up to consumer demand.

4. Will housing continue to recover? Yes, the housing market is showing renewed momentum.

5. Will labor force participation rate stabilize? Yes, but at a lower level that previously assumed.

6. Will profit margins contract? No, there’s still plenty of slack in the labor market for this to be an issue.

7. Will core inflation stay below the 2% target? Yes.

8. Will QE3 end in 2014? Yes.

9. Will the market point to the first rate hike in 2016? Yes.

10. Will the secular stagnation theme gain more adherents? No. With the deleveraging cycle over, people will believe less in the idea that we’re permanently doomed.

So basically, every answer has a bullish tilt. The economy will be above trend, margins will stay high, the Fed will stay accommodative, and inflation will remain super-low. Wow.

High five But wait, wait, that does not mean  equity markets will keep rising…

David Rosenberg is just as bullish on the economy, with much more meat around the bones, but he also discusses equity markets.

Good read: (http://breakfastwithdave.newspaperdirect.com/epaper/viewer.aspx)

Snail U.S. Population Growth Slows to Snail’s Pace

America’s population grew by just 0.72%, or 2,255,154 people, between July 2012 and July 2013, to 316,128,839, the Census said on Monday.

That is the weakest rate of growth since the Great Depression, according to an analysis of Census data by demographer William Frey of the Brookings Institution.

Separately, the Census also said Monday it expects the population to hit 317.3 million on New Year’s Day 2014, a projected increase of 2,218,622, or 0.7%, from New Year’s Day 2013. (…)

The latest government reports suggest state-to-state migration remains modest. While middle-age and older people appear to be packing their bags more, the young—who move the most—are largely staying put. Demographers are still waiting to see an expected post-recession uptick in births as U.S. women who put off children now decide to have them. (…)

Call me   HAPPY AND HEALTHY 2014 TO ALL!

 
Share

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)

image

 

large image large image

 

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. (…)

cat

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?

large image

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?

large image

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!

image

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:

image

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.” (…)

 
Share