NEW$ & VIEW$ (23 DECEMBER 2013)

Surprised smile Economy Gaining Momentum The U.S. economy grew at a healthy 4.1% annual rate in the third quarter, revised figures showed, boosting hopes that the recovery is shifting into higher gear after years of sluggishness.

Friday’s report showed consumer spending—a key driver of the economy—grew at a 2% annual rate in the summer, instead of the previously estimated 1.4%.

U.S. Economy Starts to Gain Momentum

ZeroHedge drills down:

(…) many are wondering just where this “revised” consumption came from: of the $15 billion revised increase in annualized spending, 60% was for healthcare, and another 27% was due to purchases of gasoline. The third largest upward revision: recreation services. On the flip side, the biggest revision detractors: transportation services and housing and utilities.

No boost to retailing from these revisions.

Meanwhile, profit margins keep defying the naysayers, this time because of lower taxes:

(…) after-tax corporate profits in the third quarter topped 11% of gross domestic product for the first time since the records started in 1947. At the same time, taxes paid by corporations has declined nearly 5% in the third quarter compared with a year earlier.

Another positive sign?

The U.S. economy seems to be getting “a little bit better,” said General Electric Co. Chief Executive Jeff Immelt, speaking after an investor meeting this past week. “We’ve seen some improvements in commercial demand for credit,” he said, a positive sign that companies are investing.

Wells Fargo CEO said same 10 days ago.

Is it because companies are finally investing…or because companies must now finance  out of line inventories due to the lack of growth in final demand?

real final sales

 

On the one hand, the official GDP is accelerating beyond any forecasts. On the other hand, final demand is slowing to levels which most of the time just preceded a recession. Go figure! Confused smile

But don’t despair, on the next hand, here’s David Rosenberg painting a “Rosie” scenario for us all (my emphasis):

(…) But things actually are getting better. The Institute for Supply Management figures rarely lie and they are consistent with 3.5% real growth. Federal fiscal policy is set to shift to neutral from radical
restraint and the broad state/local government sector is no longer shedding jobs and is, in fact, spending on infrastructure programs again.

On top of that, manufacturing is on a visible upswing. Net exports will be supported by a firmer tone to the overseas economy. The deceleration to zero productivity growth, which has a direct link to profit margins, will finally incentivize the business sector to invest organically in their own operations with belated positive implications for capex growth.

But the centrepiece of next year’s expected acceleration really boils down to the consumer. It is the most essential sector at more than 70% of GDP. And what drives spending is less the Fed’s quest for a ‘wealth effect,’ which only makes rich people richer, but more organic income, 80% of which comes from working. And, in this sense, the news is improving, and will continue to improve. I’ll say it until I’m blue in the face. Freezing

Indeed, all fiscal policy has to do is shift to neutral, and a 1.5-percentage-point drag on growth — the major theme for 2013 — will be alleviated. With that in mind, the two-year budget deal that was just cobbled together by Paul Ryan and Patty Murray at the least takes much of the fiscal stranglehold off the economy’s neck, while at the same time removing pervasive sources of uncertainty over the policy outlook.

Since the pool of available labour is already shrinking to five-year lows and every measure of labour demand on the rise, one can reasonably expect wages to rise discernibly in coming years, unless, that is, you believe the laws of supply and demand apply to every market save for the labour market.

Pointing up Let’s get real: By hook or by crook, wages are going up next year (minimum wages for sure and this trend is going global). With this in mind, the most fascinating statistic this past week was not ISM or nonfarm payrolls, but the number of times the Beige Book commented on wage pressures: 26. That’s not insignificant. Again, when I talked about this at the Thursday night dinner, eyeballs rolled.

There was much discussion about the lacklustre holiday shopping season thus far, with November sales below plan. There was little talk, however, about auto sales hitting a seven-year high in November even with lower incentives. And what’s a greater commitment to the economy — a car or a cardigan?

As I sifted through the Beige Book to see which areas of the economy were posting upward wage pressure and growing skilled labour shortages, I could see it cut a large swath: technology, construction, transportation services, restaurants, durable goods manufacturing.

Of the 115 million people currently working in the private sector, roughly 40 million of them are going to be reaping some benefits in the form of a higher stipend and that is 35% of the jobs pie right there. That isn’t everyone, but it is certainly enough of a critical mass to spin the dial for higher income growth (and spending) in the coming year. Macro surprises are destined to be on the high side — take it from a former bear who knows how to identify stormy clouds. (…)

On the consumer side, the aggregate debt/disposable income ratio has dropped from 125% at the 2007 peak to 100%, where it was a decade ago (down to 95% excluding student loans, an 11-year low). In other words, the entire massive 2002-07 credit expansion has been reversed, and, as such, the household sector is in far better financial position to contribute to economic activity.

On the government side, the U.S. federal deficit, 10% of GDP just four years ago, is below 4% today and on its way to below 3% a year from now, largely on the back of tough spending cuts and a big tax bite.

Then throw in the vast improvement in the balance-of-payments situation, courtesy of the energy revolution. With oil import volumes trimmed 5% over the past year and oil export volumes up a resounding 30%, the petroleum deficit in real terms has been shaved by one-quarter in just the last 12 months. This, in turn, has cut the current account deficit in half to 3% of GDP from the nearby high of 6%. (…)

In a nutshell, I feel like 2014 is going to feel a lot like 2004 and 1994 when the economy surprised to the high side after a prolonged period of unsatisfactory post-recession growth. Reparation of highly leveraged balance sheets delayed, but, in the end, did not derail a vigorous expansion.

High five That by no means guarantees a stellar year for the markets, because, as we saw in 2013 with a softer year for the economy, multiple expansion premised on Fed-induced liquidity can act as a very powerful antidote. Plus, a rising bond-yield environment will at some point provide some competition for the yield delivered by the stock market.

While 1994 and 2004 were hardly disasters, the market generated returns both years that were 10 percentage points lower than they were the prior year even with a more solid footing to the economy — what we gained in terms of growth, we gave up in terms of a less supportive liquidity/monetary policy backdrop.

But make no mistake, the upside for next year from a business or economic perspective as opposed to from a market standpoint is considerable.

Just kidding It is open for debate as to how the stock market will respond, but it is not too difficult to predict where bond yields will be heading (up) since they are, after all, cyclical by nature. Within equities, this means caution on the rate-sensitives and the macro backdrop will augur for growth over value.

Thanks David, but…

First, let’s set the record straight:

  • According to Edmunds.com’s Total Cost of Incentives (TCI) calculations, car incentives on average were flat from a year ago, though some automakers increased their incentives and even others lowered them. One car dealer said that manufacturers are pushing retailers to buy more vehicles, “slipping back into old habits”.
  • The S&P 500 Index peaked at 482 in January 1994, dropped 8% to 444 at the end of June and closed the year at 459. EPS jumped 18% that year while inflation held steady around 2.5%.
  • In 2004, equity markets were essentially flat all year long before spiking 7% during the last 2 months of the year. Profits jumped 24% that year while inflation rose from 1.9% to 3.3%.
  • In both years, equity valuations were in a correction mode coming from Rule of 20 overvalued levels in the previous years.

Second, we should remember that car sales have been propelled by the huge pent up demand that built during the financial crisis. Like everything else, this will taper eventually. The fact remains that car sales have reached the levels of the previous 4 cyclical peaks. Consider that there are fewer people actually working these days, even fewer working full time, that the younger generation is not as keen as we were to own a car and that credit conditions remain very tight for a large “swath” of the population. And just to add a fact often overlooked by economists, car prices are up 8% from 2008 while median household income is unchanged. (Chart from CalculatedRisk)

Third, it may be true that the ISM figures rarely lie but we will shortly find out if recent production strength only served to grow inventories. To be sure, car inventories are currently very high, prompting some manufacturers to cut production plans early in 2014.

Fourth, building an economic scenario based on accelerating wages invites a discussion on inflation and interest rates, both key items for equity valuation and demand. There is no money to be made from economic scenarios, only from financial instruments. Rosie’s scenario may not be as rosy for financial markets if investors become concerned about labour demand exceeding supply. (See Lennar’s comments below).

Ghost  Gasoline Heats Up in U.S.

Futures prices rose 5.9% last week in response to signs of unusually srong demand for the fuel.

Gasoline for January delivery rose 4.3 cents, or 1.6%, to $2.7831 a gallon Friday on the New York Mercantile Exchange.

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Pressure builds as retailers near the holiday finish line

(…) Thom Blischok, chief retail strategist and a senior executive adviser with Booz & Company’s retail practice in San Francisco, said many U.S. shoppers are holding back this season because they have fewer discretionary dollars.

“Sixty-five percent of (Americans) are survivalists. They are living from paycheck to paycheck,” he said. “Those folks simply don’t have any money to celebrate Christmas.”

People with annual income of $70,000 and up account for 33 percent of U.S. households, but 45 percent of spending, according to U.S. Census data crunched by AlixPartners. That group has seen the most benefit from the improving economy as rising home and stock prices bolster their net worth.

But even those with higher incomes are holding back.

“The era of ‘living large’ is now officially in the rear-view mirror,” said Ryan McConnell, who heads the Futures Company’s US Yankelovich Monitor survey of consumer attitudes and values.

Responses to the 2013 survey suggested that the “hangover effect” of the so-called Great Recession remained prevalent with 61 percent of respondents agreeing with the statement: “I’ll never spend my money as freely as I did before the recession.” (…)

Competing for shoppers led major retailers to significantly ramp up the frequency of their promotions in the first part of December, according to data prepared for Reuters by Market Track, a firm that provides market research for top retailers and manufacturers.

A group of eight major retail chains, including J.C. Penney Co Inc, Wal-Mart Stores Inc  and Best Buy Co Inc, increased the number of circulars they published between December 3 and December 18 nearly 16 percent over the comparable period a year earlier.

Those retailers, which also include Sears and Kmart, Macy’s Inc, Kohl’s Corp and Target Corp, ramped up the online deals even more, increasing the number of promotional emails by 54.5 percent, according to the Market Track data.

The battle for shoppers has also led to the most discount-driven season since the recession, according to analysts and executives.

“There is a quicker turnover of promotions this year, and now several times, within a day,” eBay Enterprise CEO Chris Saridakis said. “It’s an all-out war.”

Clock  Shoppers Grab Sweeter Deals in Last-Minute Holiday Dash

U.S. shoppers flocked to stores during the last weekend before Christmas as retailers piled on steeper, profit-eating discounts to maximize sales in their most important season of the year.

Retailers were offering as much as 75 percent off and keeping stores open around the clock starting Friday. “Super Saturday” was expected to be one of the busiest shopping days of the year, according to Chicago-based researcher ShopperTrak. (…)

Holiday purchases will rise 2.4 percent, the weakest gain since 2009, ShopperTrak has predicted. Sales were up 2 percent to $176.7 billion from the start of the season on Nov. 1 through Dec. 15, said the firm, which will update its figures later today. The National Retail Federation reiterated on Dec. 12 its prediction that total sales will rise 3.9 percent in November and December, more than the 3.5 percent gain a year ago.

Factset concludes with the important stuff for investors: Most S&P 500 Retail Sub-Industries Are Projected to Report a Decline in Earnings in Q4

In terms of year-over-year earnings growth, only five of the thirteen retail sub-industries in the S&P 500 are predicted to report growth in earnings for the fourth quarter. Of these five sub-industries, the
Internet Retail (66.7%) and Automotive Retail (10.3%) sub-industries are expected to see the highest earnings growth. On the other hand, the Food Retail (-20.2%), General Merchandise Stores (-10.6%), and Apparel Retail (-8.8%) sub-industries are expected to see the lowest earnings growth for the quarter.

Overall, there has been little change in the expected earnings growth rates of these thirteen retail subindustries since Black Friday. Only four sub-industries have recorded decreases in expected earnings growth of more than half a percentage point since Black Friday: Drug Retail, Food Retail, General Merchandise, and Hypermarkets & Supercenters. On the hand, no sub-industry has recorded an increase in expected earnings growth of more than half a percentage point since November 29.

These folks are unlikely to be jolly unless Congress acts, again at the last hour:

Tom Porcelli, chief U.S. economist at RBC Capital Markets, estimates that 1.3 million folks will lose their unemployment checks after this week, forcing some to take jobs they previously passed up or join the legions of workforce dropouts. If even half do the latter, the jobless rate could slip to 6.6% in fairly short order. (Barron’s)

This could have interesting consequences as JP Morgan explains:

(…) the potential expiration of federal extended unemployment benefits (formally called Emergency Unemployment Compensation) at the end of this month could push the measured unemployment rate lower.

The state of North Carolina offers a potential testing ground for this thesis. In July, the North Carolina government decided to no longer offer extended benefits, even though the state still met the economic conditions to qualify for this federal program. Since July, the North Carolina unemployment rate has fallen 1.5%-points; in the same period the national unemployment rate has fallen 0.4%-point. (…)

The information from one data point is a long way from statistical certainty, but the limited evidence from North Carolina suggests that the potential expiration of extended benefits will place further downward pressure on the measured unemployment rate. In which case the Fed could soon have some ‘splainin’ to do about what “well past” 6.5% means with respect to their unemployment rate threshold.

GPSWebNote ImageGPSWebNote Image

Rampant Returns Plague E-Retailers Behind the uptick in e-commerce is a secret: As much as a third of all Internet sales gets returned, in part because of easy policies on free shipping. Retailers are trying some new tactics to address the problem.

(…) Retailers are zeroing in on high-frequency returners like Paula Cuneo, a 54-year-old teacher in Ashland, Mass., who recently ordered 10 pairs of corduroy pants in varying sizes and colors on Gap Inc. GPS +0.73% ‘s website, only to return seven of them. Ms. Cuneo is shopping online for Christmas gifts this year, ordering coats and shoes in a range of sizes and colors. She will let her four children choose the items they want—and return the rest.

Ms. Cuneo acknowledged the high costs retailers absorb to take back the clothes she returns, but said retailers’ lenient shipping policies drove her to shop more.

“I feel justified,” she said. “After all, I am the customer.” (…)

HOUSING WATCH

FHFA to Delay Increase in Mortgage Fees by Fannie, Freddie

The incoming director of the regulatory agency that oversees Fannie Mae and Freddie Mac said he would delay an increase in mortgage fees charged by the housing-finance giants.

(…) Upon being sworn in, “I intend to announce that the FHFA will delay implementation” of the loan-fee increases “until such time as I have had the opportunity to evaluate fully the rationale for the plan,” he said in a statement.

The FHFA signaled that it would increase certain fees charged by Fannie and Freddie that are typically passed on to mortgage borrowers on Dec. 9, on the eve of Mr. Watt’s Senate confirmation. (…)

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don’t have down payments of at least 20% and who have credit scores of 680 to 760. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to a top of 850.) (…)

Surely, the housing market does not need more headwinds. ISI’s homebuilders survey is continuing to plunge, existing house sales have declined sharply, and existing house prices are down -1.6% from their peak.  In addition, ISI’s house price survey has been flat for five months. On the other hand, NAHB’s survey is at a new high, and housing starts surged in November. Inventory accumulation?

Pointing up Meanwhile, costs are skyrocketing:

Lennar noted that while its “aggressive” pricing strategies led to significant margin improvements, labor and construction material costs last quarter were up about 12% from a year ago, and that labor costs were up by “more” than material costs. (CalculatedRisk)

I remain concerned that higher inflation is slowly sneaking in, hidden behind weighted indices while un-weighted measures suggest that prices are being regularly ratcheted up. The median CPI, measured by the Cleveland Fed, is still up 2.0% YoY even though the weighted CPI is down to +1.0% YoY.

Differences between changes in the CPI and the median consumer price
change underscore the impact of the distribution of price movements on our monthly interpretation of inflation. The median price change is a potentially useful indicator of current monetary inflation because it minimizes, in a nonsubjective way, the influence of these transitory relative price movements.

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Assume there is no abnormal inventory accumulation and that David Rosenberg’s scenario pans out, we might get both demand pull and cost push inflation simultaneously. Far from a rosy scenario. Mrs. Yellen would have her hands full.

Thumbs up Economic Conditions Snapshot, December 2013: McKinsey Global Survey results

As 2013 draws to a close, executives are more optimistic about economic improvements than they have been all year, both at home and in the global economy. They also anticipate that conditions will continue to improve, thanks to the steady (though modest) improvements in the developed world that many expect to see.

imageIn McKinsey’s newest survey on economic conditions, the responses affirm that economic momentum has shifted—and will continue to move—from the developed to the developing world, as we first observed in September. Indeed, executives say the slowdown in emerging markets was one of the biggest business challenges this year, and respondents working in those markets are less sanguine than others about the current state of their home economies.

Respondents from all regions agree, though, on the world economy: for the first time since we began asking in early 2012, a majority of executives say global conditions have improved in the past six months.
Looking ahead to 2014, many executives expect economic progress despite growing concern over asset bubbles and political conflicts—particularly in the United States. Respondents there say that ongoing political disputes and the government shutdown in October have had a
notable impact on business sentiment, despite the less noticeable effect on the country’s recent economic data. Still, at the company level, executives maintain the consistently positive views on workforce size, demand, and profits that they have shared all year. (…)

Amid the shifting expectations for growth that we saw in 2013, executives’ company-level views have held steady and been relatively positive throughout the year. Since March, respondents most often reported that their workforce sizes would stay the same, that demand
for their companies’ products would grow, and that their companies’ profits would increase over the next six months; the latest results are no different.

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Pointing up Executives are still very focused on increasing margins!

Across regions, executives working in developed Asia are the most optimistic—and those in the eurozone are the most pessimistic—about their companies’ prospects. Forty-four percent of those in developed Asia say their workforces will grow in the next six months, while just 7 percent say they will shrink; in contrast, 31 percent of executives in the eurozone expect a decrease in workforce size. Two-thirds of respondents in developed Asia expect demand for their companies’ products and services to increase in the coming months, and they are least likely among their peers in other regions to expect a decrease in company profits.

In their investment decisions, though, executives note a new concern: rising asset prices, which could affect company-level (as well as macroeconomic) growth in the coming year. Of the executives who say their companies are postponing capital investments or M&A decisions they would typically consider good for growth, the largest shares of the year now cite high asset valuations as a reason their companies are waiting.

Strains Grip China Money Markets

Borrowing costs in China’s money market soared again, as the central bank’s recent fund injection failed to appease jittery investors amid a seasonal surge in demand for cash by banks.

Borrowing costs in China’s money market soared again after a brief fall earlier Monday, as the central bank’s recent fund injection failed to appease jittery investors amid a seasonal surge in demand for cash by banks.

The seven-day repurchase-agreement rate, a benchmark measure of the cost that banks charge each other for short-term loans, rose to 9.8%, up from 8.2% Friday and its highest level since it hit 11.62% on June 20, at the peak of China’s summer cash crunch. (…)

The stress in the banking system has spread elsewhere, with stocks in Shanghai falling for a ninth straight day Friday to the weakest level in four months while government bonds dropped, pushing the 10-yield up to near the highest in eight years.

Vietnam’s Growth Picks Up

The country’s gross domestic product grew 5.42% this year, compared with 5.25% in 2012, the government’s General Statistics Office said Monday. Last year’s GDP, the slowest since 1999, was revised up from 5.03%. Inflation was down as well.

The government said on-year growth in the fourth quarter was 6.04%, compared with 5.54% in the third quarter.

Japan forecasts GDP growth of 1.4% for 2014
Planned sales tax increase forecast to hit consumption

The Japanese government forecast on Saturday that real gross domestic product will grow by 1.4 per cent for the fiscal year starting March 2014, slowing from an expected 2.6 per cent growth for the current year as a planned sales tax increase is seen dampening consumption. (…)

The government also forecast that consumer prices will rise by about 1.2 per cent in the 2014 fiscal year, without considering an impact from the sales tax hike. Consumer prices are expected to show a rise of 0.7 per cent in the current fiscal year. The Bank of Japan launched a massive monetary stimulus programme aimed at pushing the inflation rate up to 2.0 per cent in two years, in a bid to wrench the country out of a long phase of deflation.

SENTIMENT WATCH

 

U.S. Economy Begins to Hit Growth Stride

 

Even Skeptics Stick With Stocks

Money managers and analysts say they are beginning to think the Federal Reserve is succeeding in restoring economic growth.

(…) Ned Davis, founder of Ned Davis Research in Venice, Fla., and a skeptic by nature, told clients last week that the economic picture is brightening. “There are still mixed indicators regarding economic growth, but most of our forward-looking indicators are suggesting the economy is accelerating to at least ‘glass-half-full’ growth rates,” he wrote. (…)

Because they now think the economy is on the mend, many money managers share the view that, while 2014 probably won’t match 2013, indexes probably will finish the year with gains. (…)

Ageing stocks bull can still pack some power

(…) While the S&P 500 is unlikely to match the 27 per cent jump it achieved in 2013, the odds favour another strong year for equities. Investors with a long time horizon have little to fear from wading into the market, even after a 168 per cent run-up from the index’s post-financial crisis nadir. (…)

It is no secret that companies have cut their way to profitability growth. They have put off investment, including in wages and hiring; they have slashed their financing costs by issuing record amounts of debt at this year’s rock-bottom interest rates; and they have juiced earnings per share further by buying back and cancelling shares at a pace not seen for five years.

These are trends that will all be slow to reverse. Slack in the economy will keep the lid on what companies have to spend on employees, and the benefits of those low financing costs are locked in for years to come. To the extent that wages and interest rates rise, it will be because the economic outlook is brightening, which will fill in the missing piece of the puzzle: top line revenue growth. (…)

In the historical context, current return on equity for the S&P 500 is not high; at 14.1 per cent during the last quarterly reporting season, it was only 5 basis points above the average since 1990. Profit growth, in other words, is as likely to carry on rising as it is to U-turn. Confused smile

The path of least resistance for equities is still up. There is a whole swath of bond investors who are yet to reassess their overweights in that asset class, who may do so when January’s miserable annual statements land. The diversifying “alternative” investments – hedge fund-like mutual funds and their mutant brethren – remain too expensive to become significant parts of a portfolio for most investors.

The S&P 500’s down years have all, with the exception of 1994, been recession years. Of course, the spectre of 1994 is haunting, since that was precisely when the Federal Reserve last attempted a big reversal of policy and began to raise interest rates to choke off inflation.

There is an asterisk to even the most bullish equity forecast, which is that all bets will be off if the Fed loses control of rates, dragging bond yields higher not just in the US where they might be justified, but also across the world, where they could snuff out a nascent recovery in Europe and cause untold harm in emerging markets.

After the smooth market reaction to the announcement of a slowdown in quantitative easing last week, a disaster scenario looks even more unlikely. And lest we forget, tapering is not tightening, so 2014 is not 1994.

If the S&P 500 closes out the year where it began this week, 2013 will go down as the fifth best year for share price gains since the index was created in 1957. Each of the four occasions when it did better – 1958, 1975, 1995 and 1997 – were followed by an additional year of strong returns, ranging from 8.5 per cent to 26.7 per cent.

Equity markets should maintain their positive momentum as long as the global economy maintains its, and the odds look good. Even in middle age, a bull can pack some power.

Bull Calls United in Europe as Strategists See 12% Gain

Equities will rise 12 percent in 2014, according to the average projection of 18 forecasters tracked by Bloomberg News.Ian Scott of Barclays Plc says the StoxxEurope 600 Index can rally 25 percent because shares are cheap even after a 49 percent gain since 2011. (…)

The average estimate is the most bullish since at least 2010, with no strategist predicting a gain of less than 3.3 percent, and comes even as company analysts reduced income forecasts for an 85th straight week. While more than 2.7 trillion euros ($3.7 trillion) has been restored to European equity values since September 2011, shares would have to gain another 65 percent to match the advance in the Standard & Poor’s 500 Index during the last five years.

“You would have lacked credibility being bullish on Europe 18 months ago, although stocks were very cheap and the economy was bottoming,” said Paul Jackson, a strategist at Societe Generale SA inLondon, who predicts a 15 percent jump for the Stoxx 600 next year. “As soon as the market started to do well, suddenly everybody wants to listen. And now not only is everybody listening, but everyone is saying the same thing. The time to worry about the Armageddon scenario is gone.” (…)

Analysts have downgraded earnings estimates on European companies excluding the U.K. for 85 weeks, a record streak, according to Citigroup Inc. data on Bloomberg. Mark Burgess, chief investment officer at Threadneedle Asset Management Ltd., says European earnings will probably disappoint again. (…)

“The region remains beset by relatively poor growth dynamics compared with the rest of the developed world,” Burgess, who helps oversee $140 billion from London, said in e-mailed comments on Dec. 11. “This year’s stock market recovery could easily herald a false dawn. While for the first time in three years we believe Europe is likely to return to positive GDP growth in 2014, earnings growth is likely to be steady rather than dramatic.” (…)

Evans at Deutsche Bank says his team at Europe’s largest bank has become “increasingly convinced” that lending in the region will rebound and will help companies beat estimates in what he calls investors’ “complete loss of confidence in the earnings cycle.”

The ECB said in a quarterly survey released Oct. 30 that banks expect to relax standards on corporate lending this quarter. That’s the first such response since the fourth quarter of 2009 and, if it occurs, would mark the first easing of conditions since the second quarter of 2007. Lenders also plan to simplify access to consumer loans and mortgages, and predicted a rise in loan demand.

Everybody is jumping on the bandwagon on the basis of an accelerating economy and equity momentum.

Time to stay rationale and disciplined. Good luck, and happy holidays! Gift with a bow

 

NEW$ & VIEW$ (9 DECEMBER 2013)

GREEN FRIDAY

After pretty tame Black Friday and Thanksgiving sales, investors got their Green Friday with an ‘Unambiguously Positive’ Jobs Report accompanied by a relieving 1.1% jump in the S&P 500 Index, the best of all worlds for taper advocates. Good news is good news again!

The media narratives just flowed from that.

Employers Gain Confidence to Hire

U.S. employers are gaining confidence heading into year’s end, hiring at the quickest clip since before Washington’s political dysfunction rattled consumers and businesses this fall.

Payrolls rose by a seasonally adjusted 203,000 in November in sectors ranging from construction to health care, a striking pickup at an uncertain moment for the economy. Moreover, the jobless rate fell to 7% from 7.3%, though its declines in recent months have been driven in part by people leaving the labor force. (…)

U.S. job growth over the past three months now averages 193,000. In September, the average was thought to be 143,000; it has since been revised higher. (…)November’s job gains were more broad-based than in some previous months, suggesting fundamental economic improvements are reaching more parts of the economy.

Economists have worried that the biggest drivers of the nation’s job growth are lower-paying industries like retailers and restaurants. While those industries still represent a big chunk of the job gains, higher-paying sectors like manufacturing also grew in November, adding 27,000 jobs. (…)

It remains that

Nearly one-third of the private-sector job gains in November came from retailers, hotels, restaurants and temporary help agencies.

Retailers added 22,000 workers last month, while restaurants and hotels added 17,000 positions. Temporary help services hired another 16,000.

Lower-paying industries have dominated U.S. job growth for much of the recovery. Over the past year, retailers and temporary-help services have added 323,000 and 219,000 jobs, respectively.

By comparison, manufacturers added only 76,000 jobs.

As we all know, stats can be used to fit any viewpoint: the low month for job growth in 2013 was July at 89k.

  • First 6 months average employment change: +195k.
  • Last 5 months average employment change: +181k. Not enough to call it an ‘Unambiguously Positive’ jobs report. Tapering delayed.

But move July into the first part of the year:

  • First 7 months average employment change: +180k.
  • Last 4 months average employment change: +204k. Here comes the taper!

Never mind that the economy has added 2.3 million jobs over the past year, a pace that has changed little for the past two years in spite of QE1, 2,and 3.

Never mind that

Compared with September, the last reading before the shutdown, the new figures showed 265,000 fewer people working or looking for work, taking the labour market participation rate down from 63.2 per cent to 63 per cent of the adult population.

Declining participation was the main cause of the large fall in the unemployment rate, creating a puzzle and a worry for the Fed. If people are permanently dropping out of the labour force then it suggests there is less spare capacity in the economy.(FT)

Never mind that

Markit’s recent PMI surveys showed that the rate of growth was below that seen in September. Hiring slipped to the lowest for eight months as a result of firms reporting growing unease about the outlook. (Markit)

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And never mind the important inventory build up revealed by the Q3 GDP, recent car data and clear evidence of enormous surplus retail inventory post Thanksgiving, all suggesting that the recent manufacturing uptrend may be short lived. The U.S. economy, and for that matter Europe’s as well, have been propped up by a production push rather than by a more solid and durable consumer pull.

Real consumer expenditures rose 0.3% MoM in October after edging up 0.1% in September, in spite of a 0.2% advance in real disposable income during the last 2 months. Taking the 4-month period from July, real expenditures are growing at a 1.8% annualized rate, unchanged from the preceding 4-month period. During both periods, real disposable income has grown 2.7% annualized but real labour income growth halved from 1.8% annualized in March-June to 0.9% annualized in July-October.

Consumer demand sustained by government transfer income and a low savings rate is not solid foundation for economic growth, needless to say. It gets even more dangerous when corporate inventories accumulate rapidly, especially during the all important fourth quarter.

Taper or not? Taking liquidity out when things are so fragile would be a big mistake in my view. The Fed won its bet with QE-induced wealth boost for the top 10% but it would be ill-advised to take the punch bowl away before the ordinary people’s party begins.

Fed credibility has already been hurt by all the goofy rhetoric since last May. The only transparency they have achieved is to expose their flaws wide open. When you decide to be more transparent, you better make sure that what you have to show is attractive…otherwise, be a Greenspan and let markets guess for haven’s sake.

To be sure, as BCA Research is quoted in Barron’s (my emphasis),

(…) policy makers are hoping for a cyclical rebound in the participation rate as discouraged workers are drawn back into the labor market. There is no evidence that this is occurring so far.


As a result, BCA thinks the Fed will lower the threshold for forward guidance about increases in the federal-funds target (which has been pinned near 0% to 0.25% since late 2008) until the jobless rate falls to 5% or even 5.5%, instead of the current 6.5%, which could be reached by next October if current trends continue. The Fed’s notion is that the better job market will lure folks on the sideline to start looking for work again, slowing the decline in unemployment, even as more people find positions. But BCA says its clients are increasingly worried that there is less slack in the labor market than presumed and that the Fed is making an inflationary policy mistake.

Much like a rising equity market eventually lures investors into action.

In all what was said and written last Friday, this is what must be most reassuring to Ben Bernanke:

Jonas Prising, president of staffing company Manpower Group, said the official numbers fit with what is happening on the ground. “What we see is a continued improvement in employers’ outlook. Despite what you see and hear about uncertainty, employers are clearly seeing a gradually improving economy,” said Mr Prising, noting that the pick-up in hiring was slow but steady. (WSJ)

TAPER WATCH

This is from Fed’s mouthpiece John Hilsenrath:

Fed Closes In on Bond Exit

Fed officials are closer to winding down their $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday’s encouraging jobs report.

The Fed’s next policy meeting is Dec. 17-18 and a pullback, or tapering, is on the table, though some might want to wait until January or even later to see signs the recent strength in economic growth and hiring will be sustained. On Tuesday, officials go into a “blackout” period in which they stop speaking publicly and begin behind-the-scenes negotiations about what to do at the policy gathering. (…)

The sharp rise in stocks Friday shows that the Fed is having some success reassuring investors that it will maintain easy-money policies for years to come.

(…) the November employment report was the latest in a batch of recent indicators that have boosted their confidence that the economy and markets are in better position to stand with less support from large monthly central bank intervention in credit markets.

Pointing up The economic backdrop looks better now than it did in September. Fingers crossed

Payroll employment growth during the past three months has averaged 193,000 jobs per month, compared with 143,000 during the three months before the September meeting.

Moreover, in September, the White House and Congress were heading into a government shutdown and potential a debt ceiling crisis. Now they appear to be crafting a small government spending agreement for the coming year. The headwinds from federal tax increases and spending cuts this year could wane, possibly setting the stage for stronger economic growth next year.

Still, the jobs report wasn’t greeted as unambiguously good news inside the Fed. One problem was an undertone of distress among households even as the jobless rate falls.

The government’s survey of households showed that a meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell from 7.2% to 7% during the period effectively because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.

“The unemployment rate [drop] probably overstates the improvement in the economy,” Chicago Fed President Charles Evans told reporters Friday.

Another worry among officials, and another reason some officials might wait a bit before moving: Inflation, as measured by the Commerce Department’s personal consumption expenditure price index, was up just 0.7% from a year earlier, well below the Fed’s 2% target. Mr. Evans said he was troubled and puzzled by the very low inflation trend. (…)

Fed December Taper Odds Double in Survey as Jobs Beat Estimate

 

The share of economists predicting the Federal Reserve will reduce bond buying in December doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year. (…)

The payroll report puts the four-month average for gains at 204,000, and the six-month average at 180,000. Chicago Fed President Charles Evans, a supporter of record stimulus who votes on policy this year, said in April he wants gains of 200,000 a month for about six months before tapering. Atlanta’s Dennis Lockhart, who doesn’t vote, said several months of gains exceeding 180,000 would make slowing appropriate.

“The 200,000 number hits you right between the eyes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “That’s a number that everyone agrees the labor market is showing good-size gains, and the progress they’re making seems to be sustainable if that marker is met, which it was.”

See! It all boils down to where July stands in the economic calendar.

Credit-Card Debt Hits Three-Year High

U.S. consumers pushed their credit-card debt to a three-year high in October, a possible sign of their willingness to boost spending into the holiday season.

Revolving credit, which largely reflects money owed on credit cards, advanced by a seasonally adjusted $4.33 billion in October, the Federal Reserve said Friday. The expansion pushed total revolving debt to $856.82 billion, the highest level since September 2010.

The expansion marked a reversal from the prior four months when revolving balances either declined or held nearly flat. Consumers’ reluctance to add to credit-card balances was viewed by some economists as a sign of caution.

“Increasingly households are becoming more comfortable with using their plastic, and carrying a balance on it,” said Patrick J. O’Keefe, director of economic research at consulting firm CohnReznick. “The scars of 2007 and 2008 are starting to heal.”

When consumers are willing to carry a credit-card balance, it suggests they are confident they’ll have the future income needed to pay down the debt, he said.

The turnaround came in a month that brought a 16-day government shutdown, which weighed on consumer confidence and left hundreds of thousands of government workers without paychecks for weeks. (That may have been one factor in the increased use of credit cards. The federal workers received back pay after the shutdown.)

Total consumer credit, excluding home loans, rose by $18.19 billion in October, the largest gain since May. Economists surveyed by Dow Jones Newswires had forecast a $14.8 billion advance. (…)

The Fed report showed non-revolving debt, mostly auto and education loans, increased by $13.85 billion, or a 7.5% annualized jump. Such debt has been trending steadily higher since 2010, reflecting a surge in government-backed student loans and purchases of new autos. (…)

(ZeroHedge)

Fingers crossed  Congress Readies a Year-End Budget Dash

A Congress stymied by partisan divides, blown deadlines and intraparty squabbling gets a late chance to end the year with an elusive budget deal.

In the final week of 2013 that the Senate and House are scheduled to be in Washington at the same time, lawmakers and aides are optimistic that negotiators can reach a budget accord and continue to make progress on a farm bill and other measures.

China Exports Rise More Than Estimated

Overseas shipments rose 12.7 percent from a year earlier, the General Administration of Customs said today in Beijing. That exceeded estimates from 41 of 42 analysts surveyed by Bloomberg News. The trade surplus of $33.8 billion was the biggest since January 2009, while imports gained 5.3 percent, compared with a median projection of 7 percent.

The export figures reflect pickups in shipments to the U.S., Europe and South Korea, according to customs data.

China Inflation Stays Benign

 

The November consumer-price index was up 3% from a year ago, slowing down slight from October’s 3.2% pace, the statistics bureau said Monday. That was just below market expectations of a 3.1% rise and well within the government’s target of 3.5% inflation for the year.

Consumer inflation was even less of a worry when looked at on a month-over-month basis: It showed a decline of 0.1% in November, its first such drop since May.

At the factory level, producer prices continued to slide year-over-year, falling 1.4% for the 21st monthly decline in a row, showing continued weakness in domestic demand for raw materials. The decline in November was slightly less than the October’s 1.5%.

Japanese growth revised down
Third-quarter growth hit by weaker business activity

The updated calculation of gross domestic product in the three months to September showed that economic output increased at an annualised rate of 1.1 per cent, compared with an initial estimate of 1.9 per cent announced in November. (…)

The downward revision for the third quarter owed to lower estimates of investment and inventory-building by companies. Consumer spending was revised upward, but not enough to offset the less favourable view of business activity.

Corporate capital investment did not grow at all during the period, the data showed; the initial estimate had suggested a 0.7 per cent expansion. Inventory growth was cut to 0.7 per cent from double that figure in the initial data, while the estimate of private consumption growth was doubled to a still modest 0.8 per cent.

Bundesbank lifts German growth outlook
Central bank forecasts economic expansion of 1.7% in 2014

Germany’s Bundesbank has upgraded its economic projections, saying on Friday that strong demand from consumers would leave the euro area’s largest economy operating at full capacity over the next two years.

The Bundesbank has forecast growth of 1.7 per cent in 2014 and 1.8 per cent the following year. The unemployment rate, which at 5.2 per cent in October is already among the lowest in the currency bloc, is expected to fall further. (…)

The Bundesbank also expected inflation to fall back in 2014 – to 1.3 per cent from 1.6 per cent this year – before climbing to 1.5 per cent. If falls in energy prices were excluded, inflation would register 1.9 per cent next year.

EARNINGS, SENTIMENT WATCH

Notice the positive spin and the bee-sss just about everywhere now.

U.S. stocks could weather grim profit outlooks

The ratio of profit warnings to positive outlooks for the current quarter is shaping up to be the worst since at least 1996, based on Thomson Reuters data.

More warnings may jolt the market next week, but market watchers say this trend could be no more than analysts being too optimistic at the beginning and needing to adjust downward.

“There’s a natural tendency on the part of Wall Street in any given year to be overly optimistic as it relates to the back half of the year … It isn’t so much the companies’ failing, it’s where Wall Street has decided to place the bar,” said Matthew Kaufler, portfolio manager for Clover Value Fund at Federated Investors in Rochester, New York.

So any negative news about earnings may “already be in the stock prices,” he said. Sarcastic smile (…)

Still, estimates for fourth-quarter S&P 500 earnings have fallen sharply since the start of the year when analysts were building in much stronger profit gains for the second half of the year.

Earnings for the quarter are now expected to have increased 7.8 percent from a year ago compared with estimates of 17.6 percent at the start of the year and 10.9 percent at the start of the fourth quarter. (…)

The 11.4 to 1 negative-to-positive ratio of earnings forecasts sets the fourth quarter up as the most negative on record, based on Reuters data.

So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.

In small and mid-cap stocks, the trend appears much less gloomy.

Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The S&P 500 technology sector so far leads in negative outlooks with 28, followed by consumer discretionary companies, with 22 warnings for the fourth quarter. (…)

“It appears while the percentage (of warnings) is high, it’s still not really infiltrating to all sectors,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. “Obviously it impacts the individual (stocks), but maybe not the market trend.” (…)

So, this is a stock market, not a market of stocks!

Punch  That said, here’s a surprise for you: analysts estimates have actually gone up in the past 10 days:

image

CAPITULATION
 
Hugh HendryA bear capitulates
Hugh Hendry on why equities will rise further

Hugh Hendry is CIO of Eclectica Asset Management

(…) In this environment the actual price of an asset no longer has anything to do with our qualitative perception of reality: valuations are out, liquidity in. In the wacky world created by such monetary fidgeting there is one reason for being long markets and one alone: sovereign nations are printing money and prices are trending. That is it. (…)

So here is how I understand things. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should be long risk assets if you believe China will have lowered its growth rate from 7 per cent to nearer 5 per cent over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan.

It will all end badly; the mouse will die of course but in the meantime the stock markets look to us much as they did in 1928 or in 1998. In economic terms, America and Europe will remain resilient without booming. But with monetary policy set much too loose it is inevitable we will continue to witness mini-economic cycles that convince investors that economies are escaping stall speed and that policy rates are likely to rise. This happened in May.

The Fed, convinced its QE programme had succeeded in re-distributing global GDP away from China, began signalling its intent to taper. However, the anticipated vigorous American growth never materialised. The Fed had to shock market expectations by removing the immediacy of its tighter policy and stock markets rebounded higher.

So the spectre of tapering will probably continue to haunt markets but stronger growth in one part of the world on the back of easier policy will be countered by even looser policy elsewhere. Market expectations of tighter policy will keep being rescinded and markets, for now, will probably just keep trending.

Lance Roberts today (with a lot more from Hugh Hendry if you care):

(…) The PRIMARY ISSUE here is that there is NO valuation argument
that currently supports asset prices at current levels.

It is simply the function of momentum within the prevailing trend that makes the case for higher prices from here.

image
 

Hmmm…The trend is your friend, hey? With friends like that…

THE U.S. ENERGY GAME CHANGER

I wrote about that in 2012 (Facts & Trends: The U.S. Energy Game Changer). It is now happening big time.

Shale gas boom helps US chemicals exports
America now second cheapest location for chemicals plants

The US chemicals industry is planning a sharp increase in its exports as a result of the cost advantage created by the shale gas boom, putting pressure on higher-cost competitors in Europe and Asia.

The American Chemistry Council, the industry association, predicts in forecasts published this week that US chemicals exports will rise 45 per cent over the next five years, as a result of a wave of investment in new capacity that will be aiming at overseas markets. (…)

The shale revolution has caused a boom in US production of natural gas liquids used as chemical feedstocks such as ethane, and sent their prices tumbling.

US producers also face electricity costs about half their levels in Europe, and natural gas just one-third as high.

The result has been a dramatic reversal from the mid-2000s, when the US was one of the world’s most expensive locations for manufacturing chemicals, to today when it is the second cheapest, bettered only by projects in the Middle East that have tied up feedstock on favourable terms.

International chemicals companies have announced 136 planned or possible investments in the US worth about $91bn, according to the ACC, with half of those projects proposed by non-US companies. (…)

“The US has become the most attractive place in the world to invest in chemical manufacturing.”

DEMOGRAPHICS

We can discuss political and financial philosophies, fiscal policies and monetary policies till the cows come home. But there is one thing that is mighty difficult to argue about: demographics. As Harry Dent says in this interview with John Mauldin, you have to go back 250 years to find a generation with as much impact as the current supersized baby boomer generation. The impact of retiring baby boomers is so powerful that it can totally offset fiscal and monetary policies without anyone noticing. The 20 minutes interview is not as good as I was hoping it might be but still deserves your time.

A team of Kansas City Fed economists just wrote about The Impact of an Aging U.S. Population on State Tax Revenues (http://goo.gl/u5g3j5) with this chart that summarizes the stealth trends underway:

image

Here’s another way to deal with an adverse job market:

Saudi deportations gain momentum
Riyadh to expel up to 2m workers

Riyadh has said it wants to forcibly expel as many as 2m of the foreign workers, including hundreds of thousands of Ethiopians, Somalis, Indians, Pakistanis and Bangladeshis, who make up around a third of the country’s 30m population.

At home, the exodus of illegal workers is being seen as the kingdom’s most radical labour market experiment yet. With one in four young Saudi males out of work, analysts applaud Riyadh’s determination to tackle the problem, but doubt the crackdown will achieve its objective, as Saudi nationals are unlikely to apply for menial jobs. (…)

Ethiopia, Yemen, Somalia and several other countries are struggling to absorb the thousands of unemployed young men now returning, with development officials worrying about the impact on remittances.

Saudi Arabia is the world’s second biggest source of remittances, only behind the US, with outflows of nearly $28bn last year, according to estimates by the World Bank. (…)  Saudi analysts expect the crackdown on illegal workers to reduce remittance flows by nearly a quarter next year, or about $7bn. (…)

The crackdown on African and Asian illegal migrants is meant to complement a government labour market reform known as nitaqat, Arabic for “ranges”. Replacing the failing fixed-quota “Saudisation” system of 1994, nitaqat places a sliding scale of financial penalties and incentives on employers who fail to hire enough Saudi nationals. By draining the pool of cheap expatriate labour, the Saudi government hopes to encourage private sector employers to hire more nationals.

“The nationalisation agenda has been around for 20 years, but what’s changed is that the Arab spring has made private sector jobs for nationals a political priority,” says Steffen Hertog of the London School of Economics. “Saudi Arabia has become a laboratory for labour market reform,” he says. (…)

BUY LOW, SELL HIGH

A 700- year chart to prove a point:

Global Financial Data has put together an index of Government Bond yields that uses bonds from each of these centers of economic power over time to trace the course of interest rates over the past seven centuries.  From 1285 to 1600, Italian bonds are used.   Data are available for the Prestiti of Venice from 1285 to 1303 and from 1408 to 1500 while data from 1304 to 1407 use the Consolidated Bonds of Genoa and the Juros of Italy from 1520 to 1598.

General Government Bonds from the Netherlands are used from 1606 to 1699.   Yields from Britain are used from 1700 to 1914, using yields on Million Bank stock (which invested in government securities) from 1700 to 1728 and British Consols from 1729 to 1918.  From 1919 to date, the yield on US 10-year bond is used.

Ralph Dillon of Global Financial Data

 

NEW$ & VIEW$ (6 DECEMBER 2013)

Business Stockpiling Fuels 3.6% GDP Rise

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

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

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

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

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

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

image

 

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

Honda Offers Dealers Incentives

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

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

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

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

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

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

image

 

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

image

 

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

Retailers Post Weak November Sales

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

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

Hopefully, this will help:

U.S. Crude-Oil Glut Spurs Price Drop

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

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

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

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

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

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

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

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

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

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

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

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

image

TOUGH TO BE CONSTRUCTIVE ABOUT EUROPE

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

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

German Factory Orders Decline in Sign of Uneven Recovery

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

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

EURO BANKS NEED MORE WORKOUTS:

(Morgan Stanley)

Red heart Thank You All

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

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

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

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

 

NEW$ & VIEW$ (4 DECEMBER 2013)

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

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

Auto CAR SALES NOT AS STRONG AS HEADLINES SUGGEST

 

WSJ:  Brisk Demand Lifts Auto Sales

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

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

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

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


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

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

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

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers. Company executives said the inventory levels are acceptable for this time of year.

Well, not really acceptable to Ford:

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

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

 

More inventory problems:

Inventories Threaten to Squeeze Clothing Stores

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

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

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

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

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

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

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

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

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HOUSING IS ALSO WEAK:

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


Ghost  Romain Hatchuel: The Coming Global Wealth Tax

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

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

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

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

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

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

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

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

Hmmm…

Lightning  EUROZONE RETAIL TRADE TURNS WEAKER, AGAIN

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

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European Stocks Suffer a Setback

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

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

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

BANKING

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

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

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

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

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

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

Detroit’s bankruptcy: pensions beware

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

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

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

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

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

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

 

NEW$ & VIEW$ (3 DECEMBER 2013)

Global Output and new orders rise at fastest rates since February 2011

 

At 53.2 in November, up from 52.1 in October, the J.P.Morgan Global Manufacturing PMI™  registered its highest level since May 2011. The headline PMI has signalled expansion for 11 successive months. The faster improvement in overall operating conditions was underpinned by stronger expansions of production, new orders and further job creation.

Among the largest industrial regions covered by the survey, the PMI for the US bounced back to reach a ten-month high, after slowing sharply to a one-year low in October. Growth meanwhile remained solid in Japan and the UK, with the PMI in each of these nations at their highest levels since July 2006 and February 2011 respectively. The modest and fragile
recovery in the euro area continued, while the China PMI also posted slightly above the 50.0 mark.

Global manufacturing output and new business both expanded at the quickest pace since February 2011. The trend in international trade also showed further signs of improvement, as the growth rate of new export orders hit a 32-month record.

A sign that current capacity was being tested by the combination of solid demand growth and lacklustre job creation was provided by a third successive increase in backlogs of work. Outstanding business rose at the quickest pace since March 2011.

Companies reported some success in passing on higher input costs to their clients, as average factory gate prices increased for the fourth month in a row.

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Surge in Public Construction Spending Offsets Private Pullback

October’s U.S. construction data offered a surprise for era of penny-pinching governments: A surge in public spending more than offset a decline in private building.

Spending on construction increased at a seasonally adjusted annual rate of 0.8% in October from the month before, beating the 0.4% gain forecast by economists.

The strength came from an unexpected source. State and local governments, which fund the majority of public construction, boosted spending at 3.2% pace.

The federal government boosted outlays by 10.9% in October, the largest monthly gain since January 2011. The October increase, the first month of the new fiscal year, more than reversed declines the prior two months. Federal construction spending had been weak most of the year due to across-the-board cuts put in place in March.

Meanwhile, private construction slipped in October. Private home building declined 0.6%, the third decrease in the last four months. Spending on communication, power infrastructure and recreation also fell during the month. (…) (Chart from Haver Analytics)

Factory Owners Wary of Bangladesh Pay Rise

Millions of Bangladeshi garment workers—key players in a supply chain that produces inexpensive clothing for Western retailers—got a pay raise over the weekend, as a new government-mandated minimum wage of $67 a month kicked in.

That puts Bangladesh into roughly the same league as other low-cost apparel exporters such as India, Sri Lanka and Cambodia. But factory owners here said the increase risks making the industry, a mainstay of the impoverished country’s economy, less competitive. (…)

For years, extremely low wages helped Bangladeshi apparel makers win contracts by offsetting other weaknesses that plague the industry—from inefficient factories to poor shipping infrastructure and frequent political upheaval that disrupts production.

An appreciating local currency is also adding to the challenges facing Bangladeshi exporters. The Bangladeshi taka is now trading at around 77 to the dollar, considerably stronger than January’s rate of about 84 to the dollar.

That has the effect of making Bangladeshi products more expensive overseas, at the same time that some of the country’s garment-making rivals benefitted from falling currencies. The rupee in neighboring India, for instance, is down about 12% from where it started the year, giving exporters there a boost. (…)

Factory owners said the wage increase means they will need to charge more. “At an average, we’re looking at a 20-30 cents rise on every product and that’s a surprise leap for any brand or any producer,” said Mohammadi’s Ms. Huq. (…)

A recent World Bank study found that the unit cost of producing a basic polo shirt in Bangladesh is approximately $3.46 per shirt, excluding margins and the cost of transportation to port, compared with a cost of $3.93 per shirt in China. But Bangladeshi workers produce 13-27 polo shirts per person per day, lower than the 18-35 pieces per person per day in China, the study found. (…)

European banks: más capital
Periphery banks looking better, but crisis is far from over

(…) This is typical of how banks are getting to their Basel III numbers – small disposals, exits from a few capital-intensive business lines and other changes to the asset side of the balance sheet.

But capital-raising on a different scale looms, spurred on by the European Central Bank’s Asset Quality Review next year, a new regulatory focus on the leverage ratio (capital as a proportion of total assets), and the growing tide of conduct fines. PwC estimates that Europe’s banks have a shortfall of €280bn and that €180bn of that will have to come from new equity. That is well over the new equity that the sector has raised in any year since 2008. Berenberg puts the capital shortfall at €350bn-€400bn.

So the stage is set for a tricky sales pitch to investors. Return on equity at most European banks is poor, barely scraping into double digits despite promises from some that they can make it into the mid teens. Adding more equity will not help. Offsetting that is a fall in the cost of equity – PwC says that for 16 US and European banks it has fallen from 11.5 per cent in 2011 to 9.8 per cent now. Banks might beat their cost of equity after all, but not by much. So the investment case might centre on dividends. But a sector with so much uncertainty about the amount of capital it needs is in a weak position to be making generous dividend promises.

Just kidding This could rock markets in 2014.

SENTIMENT WATCH

Has the Contrarian Investors’ Day Come?

One by one, the bears have fallen.

(…) And now there are precious few leading investors who admit to taking bearish positions on U.S. equities. Indeed, various surveys show that among investment advisers and individual investors the ratio of bears to bulls has rarely, if ever been as low as it is now.

Whisper it quietly, but this is a classic signal for contrarian investors.

The latest high profile bear to capitulate is Hugh Hendry, at the hedge fund Eclectica Asset Management. Although relatively small–Eclectica had $1.3 billion under management at the start of the year–Mr. Hendry has had a high profile for much of the past decade, having been a prominent bear in the run up to the 2007 crash.

But having taken pain from being on the wrong side of a soaring market during the past couple of years, he said recently that he’d thrown in the towel. He hates the market, but is now positioned for it to go up further.

Jeremy Grantham of the giant fund GMO and another prominent bear recently figured the U.S. market could advance another 30%, despite being some 50% overvalued. John Hussman, of Hussman funds and another bear, also figures there are risks of a further market “blowoff”–i.e. a continuation of the recent upward trend. As does Bob Janjuah at Nomura.

None of the high profile bears has actually come out and said that they believe in a bull case, that markets are cheap and need to be bought at these levels. By and large they all expect a correction and for deep market underperformance. But they’ve mostly pared back their bearish positions. But after the U.S. equity market tacked on another 30% this year, having already doubled from 2009 lows by last year, there’s not a lot more pain these investors can take.

As John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can stay solvent.”

Even if bears haven’t entirely disappeared, they seem to be in deep hibernation. (…)

The visuals, courtesy of Short Side of Long:

Based on volume trends, equities are rising not really because people are buying but rather because they are not selling, frozen in their tracks. Disappointed smile

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Meanwhile:

Boy Girl U.S. 15-Year-Olds Slip in Rankings Crying face

U.S. 15-year-olds made no progress on recent international achievement exams and fell further in the rankings, reviving a debate about America’s ability to compete in a global economy.

The results from the 2012 Program for International Student Assessment (PISA), which are being released on Tuesday, show that teenagers in the U.S. slipped from 25th to 31st in math since 2009; from 20th to 24th in science; and from 11th to 21st in reading, according to the National Center for Education Statistics, which gathers and analyzes the data in the U.S. (…)

U.S. scores have been basically flat since the exams were first given in the early 2000s. They hover at the average for countries in the OECD except in math, where American students are behind the curve. Meanwhile, some areas—Poland and Ireland, for example—improved and moved ahead of the U.S., while the Chinese city of Shanghai, Singapore and Japan posted significantly higher scores. (…)

And this chart, courtesy of Grant Williams (Things that Make you Go Hmmm…)

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Hmmm…

Call me  HELP!

I have accidentally totally removed my Dec. 2nd New$ & View$ post and it seems that the only way to recover it would be if anybody has it opened in a browser and copied it in Word or as pdf and email it to me.  Or if anybody printed it, it could be scanned and emailed at fidanza@gmail.com.

 

NEW$ & VIEW$ (25 NOVEMBER 2013)

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

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

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

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

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

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

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Continued Signs of Healing in Labor Market

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

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

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

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

HOUSING WATCH

 

Weak October Sales Have Home Builders Fretting About Spring

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

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

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

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

Hottest Housing Markets Hit Headwinds

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

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

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

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

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

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

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

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

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

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

France: The people see red

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

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

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

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

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

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

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

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

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

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

SENTIMENT WATCH

 

S&P Climbs Past 1800

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

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

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

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

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

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

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

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

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

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

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

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

BUBBLE WATCH

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Freezing  Some Stock Bulls Tread Lightly

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

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

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

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

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

 

NEW$ & VIEW$ (22 NOVEMBER 2013)

Philly Fed Weaker Than Expected

(…)  the Philly Fed Manufacturing report for November came in at a level of 6.5, which was down from last month’s reading of 19.8 and weaker than consensus expectations for a level of 11.9.  (…) every component declined in this month’s report. 

New orders remained high enough……but unfilled orders turned negative……and inventories jumped……and the workweek collapsed…

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through November. The ISM and total Fed surveys are through October. (CalculatedRisk)

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To conclude, Confused smile.

Brent Hits One-Month High; Iran in Focus

Brent crude for January delivery was up 28 cents at $110.37 a barrel on ICE Futures Europe. U.S. crude-oil futures were down 32 cents at $95.12 a barrel on the New York Mercantile Exchange.

Iran remained a major focus of attention. Negotiations continue Friday between the Islamic republic and six states that have the power to revoke sanctions on it related to its enrichment of uranium.

If Iran’s crude flows back into the market next year there could be negative price repercussions for the benchmark, Brent. But JBC Energy Markets noted that not every country stopped importing Iranian crude over the past 18 months.

China was among those who continued but it imported in much less last month.

“Chinese imports of Iranian crude were cut quite drastically in October – falling by 47% month-on-month,” they wrote in a note to clients.

The import reduction could be seen as a move to secure more favorable terms for next year’s prices, “something we have seen in previous years,” said JBC. (…)

Target Shoppers Put Less in Their Carts

The retailer said shoppers put fewer items in their shopping cart for the first time in at least six quarters.

(…) Target expects sales at stores open at least a year to be flat for the current quarter. This comes after it said it lost customers for the fourth straight quarter, ringing up 1.3% fewer transactions in its latest quarter. Shoppers spent more per transaction as they selected higher priced items like electronics, but they put fewer items in their shopping cart for the first time in four years, a sign that they are financially constrained.

Some Target customers say they are reluctant to visit for fear they will be tempted to spend too much, according to Kathee Tesija, executive vice president of merchandising, a phenomenon that Target first saw pop up during the recent recession.

Wal-Mart earlier this month cut its full-year profit forecast for a second time this year, predicting flat sales. Best Buy said this week its margins in the fourth quarter would take a hit because it will match discounts.

U.S. Wholesale Prices Fall 0.2%

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September.

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September, the Labor Department said Thursday. That was largely due to falling energy costs. Core prices, which exclude the volatile food and energy components, rose 0.2%, in line with the soft readings in recent months.

ECB’s Praet warns of deflationary pressures in euro zone

(…) Praet, who sits on the ECB’s six-strong Executive Board, said the financial crisis had saddled the euro zone with a debt burden unique in Europe’s post-war history because it has created a more deflationary environment.

“This is a very different context for the correction of expectations (about income), which is more of a debt overhang,” he told a conference at the Bank of France.

“It has more signs of a balance-sheet recession, which is a priori more of a deflationary environment than what we had in the 1960s,” added Praet, who is in charge of the ECB’s economics portfolio. (…)

 German Business Confidence Increases as Recovery on Track

German business confidence surged to the highest level in more than 1 1/2 years, signaling that the recovery in Europe’s largest economy remains on track even after growth slowed in the third quarter.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 109.3 in November from 107.4 in October. That’s the highest since April last year and exceeds all 43 economist forecasts in a Bloomberg News survey. The median was for an increase to 107.7.

Business hopes up for global economy
FT/Economist barometer shows increased optimism among executives

Global business leaders are increasingly optimistic that economic conditions will improve over the coming months, according to the FT/Economist Global Business Barometer.

In the latest results, 41 per cent of the executives surveyed said they thought the global economy would get “better” or “much better” over the next six months, with 45 per cent saying they expected it to remain the same.

This is a big jump from three months earlier, when only 27 per cent expected the global economy to improve, and 48 per cent expected it to say the same.

However, the results should be read with a degree of caution, as this quarterly edition of the survey gave the respondents additional positive options (“much better” and “better”) rather than simply the “better” of previous surveys.

Out of more than 1,800 business people polled, 53 per cent said their companies were looking to expand significantly in two to five countries over the next six months. (…)

TIME TO BE SENTIMENTAL?

Yesterday, I posted on Barclays’ analysis

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

Well, the highly volatile AAII survey now shows 29.5% bearishness while bullish sentiment declined sharply. Go figure!

 

NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

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

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

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

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

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Consumer Prices Ease Amid Lower Fuel Costs

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

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

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

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

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

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

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

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

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

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

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

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

Existing Home Sales Fall 3.2%

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

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

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

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

Americans Recover Home Equity at Record Pace

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

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

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

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

DRIVING BLIND, TOWARDS THE WALL

Fed Casts About for Bond-Buy Endgame

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

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

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

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

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

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

Millennials Wary of Borrowing, Struggling With Debt Management

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

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

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

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

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

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

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

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

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

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

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

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

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

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

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

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

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Here’s the more interesting part:

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

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GOOD READ: ASSESSING THE PARTY’S DECISIONS

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

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

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

Strong support for entrepreneurs

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

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

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

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

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

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

 

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

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

Hukou reform coming

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

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

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

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

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

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

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

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

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

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

Xi consolidates power

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