NEW$ & VIEW$ (6 MAY 2013)

Posted on May 6, 2013 by Denis Ouellet

Job Gains Calm Slump Worries

Nonfarm payrolls rose by 165,000 last month and the jobless rate ticked down to 7.5%, the lowest level since December 2008. The Labor Department also significantly raised hiring estimates for the two prior months, by a combined 114,000 jobs. (…)

The increase in 176,000 private-sector jobs, on top of a loss of 11,000 government jobs, was concentrated in a handful of service industries. The professional and business-services sectors added 73,000 jobs, including 31,000 temporary workers. Manufacturing employment stalled and construction employment contracted after gains earlier in the year.

High five But, as Markit notes:

So far this year, 783,000 new jobs have been created, comprised of a 813,000 rise in the private sector and a 30,000 drop in government jobs. That compares less favourably with last year, when a 899,000 increase
was seen in the four months to April, buoyed by a 916,000 increase in the private sector.

Sad smile In reality, after 4 months, the U.S. economy, still on hyper-strong financial heroin, has created 13% fewer jobs than during the same months in 2012.

Americans actually worked less last month because of a 0.2- hour drop in the workweek, resulting in total hours worked dropping 0.4% for the month. The U-6 underemployment rate, which covers folks who are working part-time but want full-time gigs or have stopped looking for work, ticked up to 13.9% from 13.8%, the first rise since last July, Philippa Dunne and Doug Henwood of the Liscio Report note. And in the household survey, some 306,000 joined the ranks of the self-employed, more than the total 293,000 overall gain. (Barron’s)

And this from NBF:

Private employment expanded by a consensus-beating 176,000 during the month. The rise, however, was not widespread as only 53.9% of industries increased their headcounts, the lowest proportion in eight
months (the goods sector actually shed 9,000 jobs in April).

The end result is that aggregate hours worked are only up an annualized 0.14% early in Q2, the weakest showing since Q4 2009. As today’s Hot Chart shows, this development is consistent with a significant slowdown in real nonfarm business GDP.

Spring Swoon Alive and Well in Manufacturing

The manufacturing sector failed to add any jobs last month after a meager 2,000 increase in March payrolls, a black spot on the otherwise rosy jobs report. Those numbers add to other economic data showing that demand for factory goods is falling and the sector is seeing a broad slowdown this spring. And that spring swoon could turn into a summer slide.

(…) with car sales slowing and dealer inventories climbing, the auto industry growth is likely to ease. (…)

Vehicle sales peaked in November and have fallen in four of the past five months but auto production continued at double-digit year-on-year rates through March, he said. That disconnect could result in longer summer shutdowns or slow down at some factories, robbing manufacturing of one of its growth engines.
If the auto sector is starting to sputter, the defense industry has stalled. Military factory orders plunged 34% in March, the month across-board-government cuts backs known as the sequester began. Defense spending has been volatile in recent months, but is down 25% from a year ago. (…)

Factory Orders Fell 4% in March

Demand for U.S. factory goods in March fell 4% to a seasonally adjusted $467.29 billion, the latest evidence that manufacturing sector began to slow during the month.

(…) Orders for long-lasting items, including cars and machinery, fell 5.8%, slightly worse than last week’s initial estimate.
Demand for civilian aircraft and parts fell 48.3% in March. Orders for metals dropped 3.2% and machinery demand eased 0.8%.
Meanwhile, March orders for nondurable products, reported for the first time Friday, fell 2.4%. (…) Petroleum refining fell 7.3% in March, partially reflecting lower prices. Food processing, clothing and chemical production also declined during the month. (…)
Defense capital goods orders fell 34.4% in March, the first month of the so-called sequester.
Outside of defense, factory orders fell 3.5%
Total factory shipments, including durable and nondurable goods, decreased 1% during March, compared with small gains the prior two months, the Commerce Department said. (…)

ISM Services Weaker Than Expected

This was the lowest reading since last July. Combining both the ISM Manufacturing and Services indices based on their weighting in the overall economy, the ISM for April came in at 52.8 versus last month’s reading of 54.0.

EUROZONE RETAIL SALES KEEP FALLING

Total retail volume fell 0.1% MoM in March after a 0.2% decline in February. Real retail sales have dropped 0.4% since September 2012. Core sales volume slumped 0.5% in March, following a 0.7% drop in February. Core sales volume is down 1.0% since September 2012.

This Eurostat data is for March. Markit’s retail PMI released last week said that sales continued to decline at a “sharp rate” in April:

Spanish Jobless Claims Dwindle

The ministry said the number of people filing for jobless benefits fell 0.9% in April from the prior month, to 4.99 million. Although the figures aren’t adjusted for distortions caused by seasonal trends, they show the second-largest fall in joblessness for any April since 2007, before the global financial crisis later that year sparked a deep recession across Europe in 2008 and 2009 from which countries have struggled to recover.

Portugal Unveils Budget Cuts

The prime minister’s plan would cut the number of public employees by 5%, lengthen their workweek and raise the retirement age by a year, to 66.

The plan, which aims to save €4.8 billion ($6.1 billion) through 2015, is certain to face resistance from the Socialist-led opposition and trade unions.

The government has promised to cut its budget deficit to 3% of gross domestic product by 2015, two years later than initially planned and the year Mr. Passos Coelho’s term ends. Last year’s deficit was 6.4%.

France Says Austerity Over on Germany Flexibility

French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies. (…)

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3 percent of GDP this year. The shortfall will amount to 3.9 percent of GDP this year and 4.2 percent next year with no policy change, the commission said.
There is a “certain flexibility” in allowing France, as well as Spain, to meet its deficit targets, Schaeuble told the Bild am Sonntag newspaper in an interview published yesterday. “This comes with clear conditions for the necessary reforms. The commission will make concrete proposals by the end of May which then will be discussed and decided upon among the euro area finance ministers.” (…)

Indonesian growth slips to two-year low Domestic consumption helps keep growth above 6%

(…) Gross domestic product grew 6 per cent in the first quarter compared with a year earlier, according to government data released on Monday, lower than the 6.1 per cent delivered in the last quarter of 2012.
(…) the breakdown of the GDP data shows that the pace of growth in investment across the economy is starting to slow because of the knock-on effects of lower export commodity prices.

Australia Retail Sales Fall

March retail sales were down 0.4% from February, the Australian Bureau of Statistics reported Monday, whereas economists had expected a 0.1% increase. First-quarter sales, meanwhile, rose by 2.2%—the biggest quarterly gain in six years—as consumers took advantage of heavy price discounts offered by retailers. (…)

Australian retail sales declined toward the end of last year as the mining-dominated economy slowed alongside China, the nation’s biggest trading partner. They rose 1.3% in January and February, though, as house prices and consumer sentiment picked up.

EARNINGS WATCH

The earnings season is near complete as 84% of the S&P 500 companies have declared Q1 results. The beat rate computed by S&P is at 69% while the miss rate is at 22.7%.

Q1 earnings are now estimated at $25.78, up from the March 28 estimate of $25.49 but down from last week’s surprising $26.20 number. Nearly 28% of the 97 companies reporting last week missed (vs 21% up to then), including 44% of companies in Consumer staples (vs 14%), IT (21%) and Utilities (33%).

In addition, Factset calculates that 63 S&P 500 companies have issued negative EPS guidance for Q2 2013, while 17 companies have issued positive EPS guidance. While the 79% negative ratio is not much different than that preceding Q1, there is some concern in the fact that 63 companies have guided negatively so far this season compared to 50 at the same stage in Q1, although there have been 17 positive pre-announcements this year, up from 11 last year.

In light of the above, analysts are busy revising their estimates: while Q1 EPS remain 1.1% above their March 28 forecast, current estimates for the next 3 quarters are now 2.5%, 1.7% and 1.0% lower than their March 28 estimates.

In all, EPS (per S&P) are estimated up 6.4% YoY in Q1, +5.3% in Q2, +16.4% in Q3 and +27.3% in Q4 for full years earnings up 13.6% YoY to $109.94. We will see how that evolves in coming weeks…FYI, this chart from S&P shows the incessant decline in 2013 estimates. My experience with estimates is that a good rule of thumb is that yearly estimates are generally 15% too high, meaning that it would be safer to use EPS around $101 for 2013 if you wish to use forward earnings.

For now, trailing earnings should reach $98.36 after Q1, up 1.6% from trailing EPS after Q4’12. Trailing earnings remain within their very narrow $97.40-98.70 range of the last 5 quarters, confirming that earnings have completely stalled since the end of 2011.

Unsurprisingly, this has coincided with a complete flattening of revenues since Q4’12. Q1’13 revenues are estimated up 1.5% YoY but down 0.5% from their Dec. 2011 level. It is, indeed, very difficult to grow earnings when revenues stall. Here’s what Moody’s wrote last week, to be read in the context of deteriorating conditions in the economies of most of the U.S. trading partners:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by US merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.

U.S. exports have declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.

This is why second half earnings growth projections of more than 20% appear rather heroic at this juncture.

While trailing earnings stalled, equities have roared ahead +21.8% since May 2012. During that period, U.S. inflation has declined from 2.3% to 1.5%. Under the Rule of 20, such a decline in inflation raises the fair PE by 4.5% (from 17.7 to 18.5). The remaining 17.2% advance in equity values is a re-rating of equity markets from a 27% undervaluation to a 12% undervaluation as of last Friday.

On the above chart, notice how the Rule of 20 Fair Index Value (yellow line) has moved sideways during the last 12 months while the S&P 500 Index (blue) has jumped. Stable earnings and inflation caused the sideway movement in fair value. This is why the Rule of 20 Value (black) has gone up from its May 2012 15.1 reading to its current 17.6.

Syria Strikes Raise Alarm

Strikes that Syria attributed to Israel hit an area around a research facility near Damascus, raising concerns of a widening conflict

NEW$ & VIEW$ (1 MAY 2013)

Posted on May 1, 2013 by Denis Ouellet

It seems that U.S. housing is the only area offering fresh positive stuff these days. That is if you are not in the market for a new house.

Housing Market Heating Up

Home prices are rising at the fastest rate in seven years, as buyers return to a market where property is in short supply.

Prices increased 9.3% in February from a year earlier while mortgage-interest rates hovered near record lows, according to the Standard & Poor’s/Case-Shiller index that tracks home prices in 20 major metropolitan areas. All 20 cities posted year-over-year gains for the second consecutive month, which hasn’t happened since 2005, before the crash.

In some of the hardest-hit markets, the gains have been particularly heady. Home prices rose 23% from one year ago in Phoenix and 18.9% in San Francisco. Nationally, the median home price in March stood at $184,300, well below the peak of $230,400 in 2006 but up from $154,600 in January 2012. (…)
For now, recent data suggest home-price gains are likely to continue. Sales of previously owned homes rose by 10.3% from one year ago in March, even as supplies of homes for sale fell by 16.8%. The Wall Street Journal’s quarterly survey of market conditions in 28 metropolitan areas showed very low supplies of homes available in a rising number of markets, including a less-than-three-month supply in a dozen markets, including the two hottest—Phoenix and San Francisco. (…)
At current mortgage rates near 3.5%, home values would need to rise by 32% nationally—and by as much as 48% in markets across the Midwest and north Florida—for affordability to return to its long-run average, according to an analysis by John Burns Real Estate Consulting in Irvine, Calif.

Krueger: Sequester Hits Harder, Earlier Than Expected

The economic fallout from deep federal government spending cuts has come sooner than expected, White House chief economist Alan Krueger said Tuesday.

ADP Says U.S. Companies Employed Fewer Workers Than Forecast

Companies added 119,000 workers to payrolls in April, figures from Roseland, New Jersey-based ADP Research Institute showed today.

China Manufacturing Weakens

A gauge of China’s manufacturing activity showed fresh signs of weakness in April, undercutting hopes of a stronger upturn in demand from the world’s second-largest economy.

The official Purchasing Managers’ Index came in at 50.6 in April, below expectations of a reading in line with the 50.9 recorded in March.

Note that the seasonally adjusted (by ISI) number is 49.1 vs 49.6 in March.

All but one of the official PMI subindexes—with the exception of a steady measure of raw material stockpiles—were down in April from the previous month.

The official PMI sub-index for new orders fell to 51.7 in April from 52.3 in March while the measure of new export orders slid into contraction territory with a reading of 48.6 in April, compared with 50.9 in March.
The sub-index for purchasing prices of raw materials tumbled 10.5 percentage points to 40.1 percent, the first reading below 50 after the sub-index stayed above the demarcation level for seven consecutive months.
The sub-index for finished goods inventories moved down 2.5 percentage points from the previous month to 47.7 percent, while the sub-index for production shrank slightly by 0.1percentage points to 52.6 percent.
The CFLP data also showed that the employment sub-index for April declined 0.8 percentage points to 49.0 percent, indicating job cuts, while the sub-index for supplier delivery times fell slightly to 50.8 percent.

Eurozone retail sales continue to fall sharply in April

Markit’s retail PMI® data signalled little respite for the Eurozone’s retailers at the start of the second quarter. Sales fell on a monthly basis for a survey record eighteenth consecutive month, and the rate of
decline remained sharp despite easing slightly since March. Retailers subsequently cut more staff and lowered their purchasing activity.

Retail PMI data by country signalled steep falls in sales in both France and Italy, and an ongoing flat trend in Germany. The month-on-month rate of decline in France eased from March’s record pace, but remained severe.

(…) Retailers across the Eurozone continued to cut workforces in April, extending the current sequence of job shedding to over a year. Moreover,
the rate of decline was little-changed from March’s 43-month record. Retail employment rose in Germany for the thirty-fifth successive month, but at only a marginal rate, while job shedding at French and Italian retailers remained sharp in the context of historic survey data.

(…) retailers’ gross margins continued to fall sharply, and they cut the value of purchases for the twenty-first successive month. Subsequently, stocks of goods for resale declined for the eight consecutive month, the
second-longest sequence in the survey history.

Denmark Exhausts Stimulus Avenues as Housing Losses Persist

Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started.
“We’ve used whatever leeway there is,” Economy Minister Margrethe Vestager said in a telephone interview from Copenhagen late yesterday. “There’s no more space to stimulate the Danish economy.”

Seoul offers exporters $10bn of help

Companies dealing with sluggish global demand and weaker yen

South Korea exported goods and services worth $46.3bn in April, the government said on Wednesday. This was a 0.4 per cent year-on-year rise, but down by 2.4 per cent from March’s figure.

Seoul said it would seek to revive export growth by increasing from Won71tn ($64.5bn) to Won82.1tn the value of public loan programmes aimed at small and midsized exporters. (…)

However, he cautioned that Seoul would closely monitor the weakening Japanese yen, a source of growing concern for South Korean policy makers. This follows a warning last month from finance minister Hyun Oh-seok that the yen’s slide was already having an impact on the South Korean economy.
Despite a recent fall in the US dollar value of the South Korean won, it has strengthened by 21 per cent against the yen over the past seven months, as markets anticipate expansionary fiscal and monetary policy under Japan’s new government. (…)
On Monday, data showed that South Korea’s industrial production suffered a month-on-month fall of 2.6 per cent in March: the third successive decline.

Solid rises in output and new orders support continued expansion of Japanese manufacturing economy

The headline seasonally adjusted Markit/JMMA Purchasing Managers’ Index™ (PMI™) rose to 51.1 in April, up from March’s 50.4 and a 13-month high. The PMI has shown steady improvement since the start of 2013 and has posted readings above the 50.0 no-change mark in each of the past two survey periods.

April’s survey data indicated a further rise in manufacturing output. Growth was modest, but still the sharpest in over a year as a particularly strong performance from the investment goods category offset ongoing weakness in the consumer and intermediate sectors.

Similar market group trends were observed for new orders data, with investment goods producers supporting a solid increase in sales for the sector as a whole. There was evidence of improved domestic and overseas demand, with clients reportedly investing in plant equipment and raising inventory holdings. A depreciation of the yen helped to support a solid rise in new export sales.

SENTIMENT WATCH: BAD SURPRISES? SO WHAT!

The chart below shows the 26-week rolling correlation of the Economic Surprise Index and changes in the S&P 500. A declining line represents periods where economic data and the S&P are becoming less correlated, or even moving inversely to each other. The most recent correlation below -0.7 indicates that stocks and negative economic data are moving in almost perfectly opposite directions. (Bill Hester via John Hussman)

Slovenia Junks Its Bond Sale After Downgrade

Slovenia stunned investors when it halted a bond sale just before Moody’s downgraded the country’s debt to “junk.”

The government said it would proceed with the bond issue. However, Slovenia will likely see higher borrowing costs, some investors said. Now that its bonds are rated junk, they will be off limits to investors that buy only investment-grade debt. Slovenia’s 10-year bond yielded 5.847% on Tuesday, compared with 5.69% a day earlier. (…)
Moody’s said it was concerned about Slovenia’s undercapitalized banking sector and deteriorating government balance sheet.

Rift Emerges Over Saudi Oil Policy

A rare public dispute over oil policy in Saudi Arabia emerged as the kingdom’s oil minister and a senior member of its royal family disagreed over long-term production targets for the world’s largest crude exporter.

The Middle Eastern kingdom, which produces around 10% of the world’s oil, needs to increase its crude production capacity by a fifth to 15 million barrels a day by 2020 in order to meet rising domestic consumption and maintain its current export capacity, said Prince Turki al-Faisal, a former intelligence chief and ambassador for the kingdom. (…)
The comments from the prince, who has no formal government position, but is a prominent member of the kingdom’s royal family, were contradicted by Saudi Oil Minister, Ali al-Naimi. There is currently no need to increase crude production capacity beyond 12.5 million barrels a day, Mr. Naimi said.
Saudi Arabia currently produces around 9 million barrels a day of oil, leaving 3.5 million barrels a day as spare capacity. (…)
Prince Faisal’s comments also run counter to the official position of the state-controlled Saudi Arabian Oil Co., also known as Aramco. Aramco declined to comment Tuesday, but its top executive has previously ruled out increasing capacity to 15 million barrels a day despite acknowledging that domestic use of crude would rise and thus limit exports.
Aramco’s Chief Executive Khalid al-Falih ruled out increasing Saudi production capacity to 15 million barrels a day in 2011, despite acknowledging that domestic use of crude would rise and thus limit exports, because he said expansion plans in other producing countries such as Iraq and Brazil should be enough to satisfy world markets. (…)
Saudi Arabia last year consumed around 3 million barrels per day of oil, according to the U.S. Energy Information Administration, almost double its 2000 level and putting it on track to use more than 5 million barrels a day if a 7% annual growth rate were to continue.
Aramco’s Mr. al-Falih acknowledged in 2011 that, if left unchecked, domestic energy consumption would rise to 8.2 million barrels of oil a day by 2030. (…)

Remember: the Saudis need $100 oil to balance their budget.

NEW$ & VIEW$ (25 APRIL 2013)

Posted on April 25, 2013 by Denis Ouellet

SOFT PATCH WATCH

Spring Slowdown Hits Factories No matter how you slice it, the durable goods report was miserable.

New orders for all durable goods plunged 5.7% in March, about double the 2.9% drop expected. Falling demand for aircraft and defense goods contributed much of the weakness, but not all of it. Of the major categories, only computer makers reported an increase in new orders.

For the first quarter, new orders and the backlog of unfilled demand were pretty much flat compared to year-earlier levels. Shipments held up. But orders are the lifeblood for future production. Unless order books fatten up, gains in production and shipments will slow soon.
Businesses have joined consumers in the spring siesta. New orders for core capital goods — which excludes aircraft and defense equipment — edged up 0.2% in March, but are no higher than they were a year ago.

How miserable? NBF Economics explains:

To say that US durable goods orders were weak in March is an understatement. The 5.7% drop is the worst monthly performance since last August. And with orders being outpaced once again by shipments, unfilled orders fell. That extended the declining trend in the year-on-year growth rate of unfilled orders.

As today’s Hot Charts show, such a decline is typically associated with soft patches, if not recessions. Note the year-on-year contraction in unfilled orders for non-defense capital goods excluding aircrafts, a proxy for business investment spending.

The uncertainty brought by the fiscal cliff and subsequently by the sequester are possible explanations for this atypical drop. That already
seems to be capping employment growth in the manufacturing sector and if orders continue to disappoint, things could get worse on that front.

Weaker PMI data hit markets on global growth worries

Weaker than expected flash PMI surveys from Markit for China, the US and the euro area have increased worries about the global economy.

(…) the fact that the weakness of the China PMI was driven by slower new order growth, reflecting a renewed decline in new export work, led to growing fears about global demand (…).

The downbeat news was followed by some brighter news as an upturn in the Markit flash PMI for France indicated a marked easing in the pace of economic contraction for April. The manufacturing PMI came in broadly as forecast (44.4 against a consensus of 44.1), but the service sector PMI jumped to 44.1 against a consensus of 42.0. However, the rally was short-lived, as German flash PMI data fell well short of expectations. The manufacturing PMI for Germany slipped to 47.9 (consensus: 49.0), while activity in the service sector contracted slightly with the respective index down to 49.2 and confounding expectations of a rise to 51.0.

U.K. Economy Avoids Further Contraction

In its preliminary estimate, the Office for National Statistics said gross domestic product grew 0.3% in the first three months of the year compared with the fourth quarter. Economic output was 0.6% higher compared with the first quarter of 2012.

But: Retailers gloomiest for 15 months in April

UK retailers reported a drop in sales on average for the first time in eight months in April, and the outlook for sales in the coming month darkened to the gloomiest for 15 months, according to the CBI.

Letta calls for easing of austerity policies

Italian bond yields close to recent record lows

“Europe’s policy of austerity is no longer sufficient,” he said, echoing similar remarks this week by Jose Manuel Barroso, European Commission president.

Italy Led by Letta Brings Berlusconi Back as Winner

Silvio Berlusconi, the three-time prime minister and two-time convicted lawbreaker, won a path back to power in Italy by outmaneuvering rivals during an eight- week political stalemate.

Spanish unemployment tops 6m

Record figure piles pressure on Madrid to ease austerity

Almost 240,000 people lost their jobs in the first three months of the year, according to Spain’s national statistics office, taking the overall number of jobless to 6.2m. The unemployment rate rose by more than 1 point to 27.16 per cent – worse than predicted by most economic forecasters.
The statistics office also revealed that almost 2m out of 17.4m Spanish households are now without a single person holding a job. (…)
The drop in employment in the first quarter was broadly similar to the falls seen in the past three quarters, and higher than in the corresponding period last year.
Job losses were particularly heavy in the services sector, but also in industry and farming. Employment dropped further in the construction sector, which has already shed more than 1.6m jobs since 2008 as a result of the bursting of Spain’s housing bubble. (Chart from El Pais via Ft Alphaville)

South Korea growth at two-year high

First-quarter GDP of 0.9% boosted by export recovery

Why Housing Won’t Save the U.S. Economy

In a new essay, University of Chicago’s Amir Sufi says we should “temper our optimism on what a housing recovery can do for the U.S. economy.”

(…) The crux of his argument is that a key way that housing stimulates growth — the so-called “wealth effect” in which people spend more because they feel richer as the value of their home increases — is likely to be muted because many of the borrowers who spent most liberally during the housing boom aren’t getting mortgages today. (…)
Mr. Sufi has done research suggesting that homeowners borrowed about $1.25 trillion out of their homes from 2002 to 2006. He finds that this spending wasn’t uniform. Homeowners with the lowest credit scores were very aggressive, he says, borrowing $0.40 against every dollar of increased housing equity, while those with the best credit “were almost completely passive,” pulling almost no equity out of their homes when house prices increased.
The inverse was true when households cut back on spending after the bust. Borrowers with weaker credit were more constrained and cut back much more dramatically on spending. (…)
“The only people getting mortgages at this point are those with pristine credit histories, which are exactly the group least likely to consume out of their housing wealth,” says Mr. Sufi. (…)

EARNINGS WATCH

Mediocre Earnings and Revenues

Below is an updated look at the earnings and revenue beat rates for stocks that have reported so far this earnings season. Last Friday we noted that the earnings beat rate stood at 58%, while the revenue beat rate was much lower at 43.9%. Another 250 companies have already reported this week, which is more than double the amount that had reported all season from April 8th through April 19th. As shown below, the earnings beat rate has taken a hit with this week’s reports added into the mix. As it stands now, 56.9% of the 458 US companies that have reported have beaten earnings estimates. This would be the lowest reading seen since the bull market began, so the remaining companies that still have to report have some work to do!

NEW$ & VIEW$ (8 APRIL 2013)

Posted on April 8, 2013 by Denis Ouellet

How bad is it? Global negative surprises. Some positives. China also so-so, not so Europe. Copper.

HOW BAD IS IT?

Job Growth Slows

Employers slammed on the brakes in March, keeping the recovery from shifting to a higher gear despite a mending housing market and steady consumer and business spending.

The March reading stirred some fears of yet another “springtime swoon” for the labor market. In recent years, hiring has started the year strong, only to wilt as the weather warmed.

Friday’s report underscored this point, as the government revised up its estimates for January and February by a combined 61,000 jobs. Even with those revisions, however, job growth started 2013 weaker than in the same period a year ago, suggesting the pace of hiring was trending down before March.

Silver linings in the details were scant, beyond higher estimates for January and February’s tallies. Employers took on 20,000 temporary workers in March, often seen as a hiring bellwether. The construction sector added 18,000 jobs, reflecting the housing market’s healing, but well below the nearly 50,000 added the month before. Governments shed 7,000 jobs in March.

Jobs Report Hits Fed in the Jawbone The weak jobs numbers have put Federal Reserve officials back in wait-and-see mode.

(…) There’s reason to think the job market is in better shape than the report showed: The weakness may merely be a payback for February’s strong jobs count, which the Labor Department revised up by 32,000, to 268,000. A more wintry March than the U.S. has seen in recent years also may have pushed back some seasonal hiring. And given the employment report’s standard error of plus or minus 90,000 jobs, the three-month average gain of 168,000 might be a better reflection of what’s going on.

Doug Short did the work on revisions for us:

My approach is to take the employment numbers since January 2000 and plot the change from the first to third estimate for each month through January 2013, the most recent month for which we have three estimates.

During this timeframe there were 91 upward revisions and 63 downward revisions. The absolute mean (average) revision was 46 thousand, which breaks down as 48K for the upward adjustments and 44K for the downward adjustments.

Revisions remain generally positive, a good thing. Still, the 131k drop in the 3ms m.a. is significant. In April 2012, the 199k drop in the m.a. continued into a 463k loss through June.

What is also disturbing is that household employment has flattened out in the last 6 months while payroll employment kept rising. How will they meet next?

Hint: the NFP surveys were conducted in mid-March. Weekly unemployment claims rose in late March. To be closely monitored.

Surprised smile For every new job in March, five Americans left the labor market.

Dropout Number Is Worrisome for Labor Market

(…) The share of the population that’s either working or looking for work, a metric known as the participation rate, fell to 63.3% in March, its lowest level since 1979. Nearly half a million Americans dropped out of the labor force in March, the biggest one-month decline since December 2009.(…)

March’s labor force decline was concentrated not among retirement-age baby boomers but among those under age 25, who accounted for nearly half of all drop-outs. The participation rate among those under 25 has fallen below 55%, from just under 60% when the recession began. That reflects to some degree the long-run increase in college attendance, but the big one-month drop also suggests young people are struggling to find work in the still-shaky economy.
Among those in the middle of their working lives, the downward trend is milder but still unmistakable. The participation rate for so-called prime-age workers—those between 25 and 54—was 81.1% in March, the lowest level since 1984. There is no benign explanation for that decline: The number of prime-age workers counted as “unemployed” has fallen by 731,000 in the past year, but just 166,000 of those workers found jobs; the rest simply gave up looking. (Chart from IBD)

Politicians and economists often forget this is not a board game. Economic decisions have real meanings. If you raise payroll taxes, it will have two consequences:

People will spend less.
Employers will hire less.

Tack on to that ObamaCare’s incentives for employers to reduce staff count below 50, cut working hours and increase temps and you eventually get a nasty real world impact.

The 24k drop in retail workers in March reflects the big slowdown in sales, in spite of an early Easter:

The 20k gain in temp workers may not be the usual positive bellwether.
The decline in the labor force is extraordinary and not simply explained by demographics:

Has the great American work ethic suddenly vanished? Doubtful. A more likely explanation for the shrinking workforce is a failing education system that doesn’t give young adults the skills they need to compete in the information economy.
Another probable culprit is the rapid expansion of government payments—jobless insurance, food stamps, Medicaid, disability and various tax credits—that provide millions with an alternative income to getting a job. Research by Casey Mulligan of the University of Chicago and others shows that the generosity of federal benefit programs means that workers face very steep financial disincentives to take a low-wage job. The benefits phase out as they begin to work. (WSJ:Making Work Not Pay)

Regarding education, the March survey of National Federation of Independent Business revealed that

Forty-seven percent of the owners hired or tried to hire in the last three months and 36 percent (77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.

The NFIB continues:

Job creation plans fell 4 points to a net 0 percent planning to increase total employment, a disappointing outcome. Not seasonally adjusted, 15 percent plan to increase employment at their firm (down 2 points), and 5 percent plan reductions (down 2 points), a bit of frost on the “green shoots” that appeared to be emerging in the first quarter. Owners are still pessimistic and see little reason to hire.

And we have not seen much effect from the sequester, yet.

The sequester could take some time to show up in official data. The sweeping furloughs set to start in coming weeks will take a bite out of government workers’ paychecks, and most likely out of their consumer spending, but most of those jobs won’t disappear. The budget cuts would need to remain in place for months before more agencies start to shed jobs outright.(…)
In March, the federal government’s civilian workforce fell by just 2,000, apart from almost 12,000 cuts at the U.S. Postal Service. (…)
State and local governments get about a quarter of their funding from Washington. But the budget cuts don’t appear to have hit them hard in March, either. State-government jobs rose by 9,000 to 5.1 million, the second straight monthly increase. Local-government employment dipped by just 2,000 jobs, sitting around 14 million. (WSJ)

Meanwhile, weekly hours are rising at a snail’s pace and hourly earnings are not keeping pace with inflation.

Income supplement:

Consumer Credit Jumps on Student, Auto Loans

The month’s gain was largely due to a $17.6 billion increase in nonrevolving credit, which includes student loans and auto financing. Revolving credit, which mainly consists of credit-card debt, increased $532.82 billion in February to about $848 billion outstanding.

On the other hand…NBF economists keep their faith:

In our view, some of the softness was certainly attributable to unusually harsh weather. As today’s Hot Chart shows, agricultural employment slumped 64,000, the worst showing for a month of March in three years. Also, retail employment at building materials & garden supply stores fell 10,000 (the worst in three years) while that at clothing stores plummeted 15,300 (biggest drop since the recession). We expect the situation to improve in those industries as temperature returns to more normal patterns.

The authoritative Browning Newsletter cools any excessive weather enthusiasm, however:

For most of 2013, the dominant factor shaping the weather has been the Arctic Oscillation, the winds that circle the northern latitudes. Last year the AO was extremely positive, which meant that it trapped the cold polar winds north and relatively few escaped and chilled the middle latitudes.
This year, the AO was negative during a couple of weeks in December, positive during most of January and February and negative in March. During the last two weeks of March, it turned sharply negative. What this meant in North America is that December had some storms, January and February were warmer than average and March has been a beast. Cold Arctic winds poured through most of the US east of the Mississippi.

Reminder: the NFP surveys were conducted in mid-March.

Here’s the weather forecast:

Meteorologists are already predicting an unusually stormy springtime, pounding the Gulf in April and moving up the Eastern Plains to the Midwest and Great Lakes in May and June.

Housing is better but exports are flattening. Anybody surprised?

NEGATIVE SURPRISES ARE GLOBAL

Ineichen Research and Management AG

Of 15 PMI readings in March, 8 were below 50 vs 7 in Jan-Feb. The U.S. manufacturing ISM dropped from 54.2 to 51.3. The non-manufacturing index declined from 56.0 to 54.4.

POSITIVE NOTES

The BOJ announced “all the policy measures imaginable”, to be tacked on top of all other QEs of the world. ISI calculates that “the combined balance sheets of the Fed/BoJ will increase +$160b per month, or +$40b per week, or at almost a +$2t a.r. This is so hard to fathom that it’s unlikely market participants have fully digested it. And other central banks are likely to join in.”
Ward’s said that U.S. vehicle production is scheduled to grow 9% QoQ annualized.
Gasoline futures dropped nearly $0.25.
Cass Freight Index Report™ ‐ March 2013

Shipment volume jumped up 5.8 percent from February to March, following a 5.6 percent rise in February. Compared to March 2012, shipments were up 4.2 percent, the largest year‐over‐year increase since October 2012. On a cumulative basis, freight shipments have increased 6.4 percent since the end of last year over the same period in 2012.

Truck tonnage data is not yet available for March, but it has been on the rise since November, according to the American Trucking Association. Weekly truck loading indicators are showing an uptick in March. Rail reported mixed results, with carloads up 0.3 percent and intermodal down by 5.1 percent. Most of the carload gains are in petroleum and petroleum products. Shipments of products related to construction, including stone and gravel, lumber and fabricated steel, are increasing. Truck flatbed loads were reported up every week. Exports were also up in March.

Freight expenditures rose 6.5 percent in March and are 4.4 percent above the same period last year. Much of the monthly increase can be attributed to the rise in the number of shipments. However, in recent weeks there have been more reports of higher rates for truckloads, particularly on the spot market, as demand builds.

Well, we just got the Association of American Railroad report for March.

The Association of American Railroads (AAR) today reported that U.S. monthly rail traffic showed mixed results in March 2013, while both carloads and intermodal traffic declined for the week ending March 30, 2013.
Intermodal traffic in March 2013 totaled 933,208 containers and trailers, up 0.5 percent (4,859 units) compared with March 2012. That percentage increase represents the smallest year-over-year monthly gain for intermodal since August 2011.
Seven of the 20 major commodity categories tracked on a monthly basis by AAR saw year-over-year increases in March 2013 over March 2012.
AAR today also reported declines in rail traffic for the week ending March 30, 2013. U.S. railroads originated 281,367 carloads last week, down 1.9 percent compared with the same week last year, while intermodal volume for the week totaled 233,587 units, down 3.8 percent compared with the same week last year.

In all, a so-so month ending on a weak note.

CHINA RECOVERY ALSO SO-SO

In the traditional busy season, demand improved among industrial sectors. The demand recovery observed by respondents is slightly stronger than it was in March of 2012. Infrastructure projects were the main sources of demand in up- and midstream sectors. Respondents from the cement and construction machinery sectors reported above-expectations sales data. However, demand recovery for steelmakers and machinery tool manufacturers remained relatively weak. Auto sales were also below expectations, and automakers became more cautious as a result. The discrepancy among different sectors suggests that the seasonal recovery was relatively modest. (CEBM Research)

BUT NOTHING SO-SO IN EUROPE

Eurozone downturn intensifies as German economy shows near-stagnation

At 46.5 in March, the final Markit Eurozone PMI® Composite Output Index was unchanged on the flash reading, confirming that the rate of decline in activity accelerated for the second month in a row to reach the fastest since last November. (…)

Of the four largest euro nations, France saw the steepest downturn with output falling at the fastest rate for four years, while severe contractions were again recorded in Spain and Italy (albeit with the latter showing a marginal easing in the rate of decline). Only Germany continued to see higher business activity, though even there the rate of expansion slowed sharply to near-stagnation. (…)

March saw the largest monthly fall in new orders since December. New business dropped at the fastest rate since September in the service sector,
while manufacturers reported the steepest drop in new orders since December.

New orders fell for the first time in three months in Germany, accompanied by sharp rates of decline in France, Italy and Spain.

And in case you missed that in late March:

The downturn in the Eurozone retail sector gathered momentum at the end of the first quarter, Markit’s retail PMI® data for March showed. The rate of decline in sales in the latest period was the fastest since May 2012, and the trend over the first quarter as a whole was the second-weakest since Q1 2009. (…)

Retail PMI data by country signalled steep falls in sales in both France and Italy, and a broadly stable trend in Germany.

In particular, the month-on-month rate of decline in French retail sales accelerated further to a new survey record (data were first collected in January 2004). Moreover, the pace of contraction in France was fractionally faster than that registered in Italy – the first time that France had registered a worse performance than Italy since February 2011. Italian sales continued to fall sharply, but at a weaker rate than the trend shown over 2012.

German Industry Rebounds

Total industrial output in February increased 0.5% on the month, beating economists’ forecasts of a 0.4% gain, data from Germany’s Economics Ministry showed Monday. But a sharp downward revision of January’s industrial output data—to a 0.6% monthly drop from a previously reported flat reading—indicates that any industrial recovery remains muted and that overall economic activity in the first quarter may not have been as strong as previously expected. (…)

In an annual comparison, industrial production was down 1.8% when taking account of the number of working days in February 2013 vis-à-vis February 2012.

Bridgewater Asks “Could Italy Blow Up The Euro?”

Economic conditions in Italy are as depressed as they’ve been since the end of WWII, the economy is still contracting, Italy’s banks are in terrible shape, private sector lending is very strained, and the ECB’s policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. (…)
So there is a risk that if economic conditions continue to be terrible and the political situation gets more extreme, the pressure on the banks will increase, and the sovereigns could start to have trouble (and with the political uncertainty, should the need arise, who would the Troika negotiate with?).
Italian banks increasingly look strained, both outright and relative to Spain. Bank CDS spreads have risen 150 basis points and bank eguity prices have fallen 30% in the past two months, and there are some indications of stress in the bank funding flows. Unlike in Spain, Italian banks have not decreased their reliance on the ECB at all, and in February they actually increased their net ECB funding. At the same time, wholesale funding lines with banks and non-banks are falling, and Italian banks have had substantial bond redemptions that they haven’t rolled in February and March. Italian banks are getting liguidity by reducing private sector loans and through a healthy inflow of retail deposits, which is helping them to pay for the wholesale funding that is leaving. Italian banks bought government bonds at a healthy pace in January, but the purchases slowed in February, and they have been selling foreign corporate and bank bonds for the past six months. (…)

Eurobanks bleeding, even before Cyprus.

Deposits in Spain and Portugal are bleeding with annual rates of 10%. This, together with rising non-performing loans and increased capital requirements will make banks reduce their lending, choking small and medium-sized companies. (Lighthouse Investment Management)

EU’s Rehn: Big depositors could suffer in future bank bailouts under new law

“Cyprus was a special case … but the upcoming directive assumes that investor and depositor liability will be carried out in case of a bank restructuring or a wind-down,” Rehn, the European Economic and Monetary Affairs Commissioner, said in a TV interview with Finland’s national broadcaster YLE.
“But there is a very clear hierarchy, at first the shareholders, then possibly the unprotected investments and deposits. However, the limit of 100,000 euros is sacred, deposits smaller than that are always safe.”

Bank runs in Europe are now only one rumor away…

Portugal court rules against austerity

Move threatens €78bn bailout programme and 2013 budget

In a long-awaited decision late on Friday night, the constitutional court rejected cuts in state pensions and public sector wages in a ruling that could force Pedro Passos Coelho, the prime minister, to negotiate alternative deficit reduction measures with international lenders.
Economists calculated that the measures deemed unconstitutional represented between €900m and €1.3bn in government revenue and savings, about 20 per cent of the €5bn the government planned to gain from austerity measures this year.
The court rejected cuts in state pensions and public sector pay equivalent to about 7 per cent of annual income as well as cuts in sickness and unemployment benefits.
A contested “solidarity” tax surcharge ranging from 3.5 to 10 per cent on pensions of more than €1,350 a month was accepted by the court as well as a 50 per cent cut in overtime pay rates for public sector workers.

Portugal Plans Spending Cuts After Ruling on Salaries

When it rains, …

Copper price set to fall amid high output

Production rises at fastest rate in decade

Wood Mackenzie, a leading consultancy, expects 2013 to see the biggest percentage increase in global mine production since 2004.

NEW$ & VIEW$ (5 APRIL 2013)

Posted on April 5, 2013 by Denis Ouellet

Soft patch here? Canada’s pothole. Eurozone’s pit. ECB clueless. BOJ all out. The template.

US adds lacklustre 88,000 jobs in March

Reading raises worries budget cuts are slowing labour market

According to data released on Friday by the labour department, the unemployment rate ticked down to 7.6 per cent, but for discouraging reasons: the share of Americans in the labour force dropped to its lowest level since 1979. (…)
Government employment fell by 7,000, offering evidence that austerity at the federal level was setting in gradually. But the jobs in the private sector were much harder to come by than in February, with manufacturing losing 3,000 jobs, construction gaining 18,000 and retail losing 24,000.

Canada Records Biggest Job Losses Since 2009 Recession

The drop of 54,500 positions reported today by Statistics Canada offset a 50,700 gain in February, and the unemployment rate rose for the first time in five months, to 7.2 percent from 7 percent. (…)
Full-time employment fell by 54,000 in March while part- time work declined by 400 positions, according to the Ottawa- based agency’s report.
Private companies cut 85,400 workers and public-sector employment fell by 7,700.

Euro-Zone Retail Sales Fall Again

Retail sales fell in the 17 countries that use the euro in February, underscoring the weakness in consumer demand that may delay an economic recovery leaders hope to see this year.

Eurostat, the European Union’s official statistics agency, said Friday that retail sales in February fell 0.3% on the month and by 1.4% on the year.

Notice that core sales declined 1.1% in February, -0.2% in the last 3 months and -2.2% in the last 6 months. Real sales collapsed 2.2% in France in February. (Eurostat)

Germany says confident France will meet deficit obligations

Germany is confident France will stick to European Union rules on targets to cut its public deficit, a German finance ministry spokesman said on Friday, a day after Paris urged Berlin to grant it more time to hit the goal.

“There are rules in the EU that apply for all. It’s mostly down to the EU Commission to evaluate how to proceed further. Then the members of the EU council will look at it,” said Martin Kotthaus, spokesman for Germany’sfinance ministry.

ECB’s Draghi Hints at Rate Cuts

European Central Bank President Mario Draghi signaled that the ECB is reluctant to take innovative measures to revive output and employment, but opened the door to an interest-rate cut if the euro zone’s flagging economic-growth prospects fail to improve.

German Manufacturing Orders Increase More Than Forecast

Orders, adjusted for seasonal swings and inflation, increased 2.3 percent from January, when they dropped a revised 1.6 percent, the Economy Ministry in Berlin said today. In the year, workday-adjusted orders were unchanged. (…)

Export orders in Germany climbed 2.3 percent in February, with those from the euro area gaining 1.6 percent, today’s report shows. Domestic sales rose 2.2 percent. Orders for investment goods increased 3.5 percent.

Europe to Shut 10 Refineries as Profits Tumble Oil refiners in Europe will shut 10 percent of their plants this decade as fuel demand falls to a 19-year low.

Money Spigot Opens Wider

[image] The Bank of Japan will join major central banks that since the financial crisis have been testing the limits of their powers in a grand—and some say risky—experiment to stimulate the sluggish global economy.

“This is an entirely new dimension of monetary easing, both in terms of quantity and quality,” the Bank of Japan’s new governor, Haruhiko Kuroda, said Thursday. The BOJ said the programs would continue at least two years. (…)
The Bank of Japan, for years the most conservative of the major central banks, has come out swinging. The BOJ’s new bond-buying program, for example, is more than 60% larger than the Fed’s monthly purchases of Treasury and mortgage-backed securities, as a percentage of gross domestic product.

For BOJ, Moving Markets Is the Easy Part The BOJ’s announcement that it will substantially increase and broaden its asset purchases had an immediate impact on markets—but moving the real economy is another matter entirely.

(…) Doubling the monetary base—the narrow money supply that is under the central bank’s control—may not stimulate actual investment and boost growth, says Hiraoki Muto, senior economist at Sumitomo Mitsui Asset Management. To make a difference, that base-money creation has to pass through to the broader economy—and the last time Tokyo embarked on a program of quantitative easing, between 2001 and 2006, Japan’s banks sat on the base money and investment didn’t get a lift.(…)

Soros Joins Gross in Warning Kuroda Plan Risks Yen Rout

“If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche,” Soros said today in an interview on CNBC. (…)

Kuroda may have difficulty achieving his inflation goal, Gross said. Group of Seven nations may press Japan to control the pace of the yen’s decline to temper gains in their own currencies, he said.

THE TEMPLATE

Eric Sprott & Shree Kargutkar, Sprott Asset Management:

This “template” is already being applied to the “too big to bail” banks in other developed countries around the world. A statement in the joint paper published by the FDIC and the Bank of England in December 2012 reads:
“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailedin creditors would become the owners of the resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.²
Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected. In a similar vein, Canada’s recently released budget addresses the same problem. Page 144 of Canada’s Economic Action Plan 2013 reads:
“The Government proposes to implement a – bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.”³
Likewise, New Zealand’s Open Bank Resolution policy allows for a “bail in” of afflicted banks by wiping out the equity holders first, the bond holders second and finally forcing a haircut on the depositors.⁴
Over-levered banks are not a recent development. We are faced with a banking crisis, seemingly once every generation. In a majority of cases, the bad banks were allowed to fail and newer, stronger banks took their place. However, the recent modus operandi of the central banks and policy makers allowed over-levered banks to get even bigger, rewarded risk taking with bailouts and let the inherent problem of unsustainability fester.
We carried out the exercise of taking the largest banks, or in other words, the “too big to fail” banks in the G7 countries and added up their assets in relation to the host country GDP. (…) With the exception of the US, all G7 countries have banking systems that have become larger and in some cases dwarfed their respective economies.
Governments around the world are finally beginning to realize the gravity of the risk that exists in their banking sectors. The EU has decided to build upon the new template of the “bail-in” regime. The US, UK and Canada have all followed suit. This puts the onus squarely upon the depositor. (…) Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks. Several G7 countries already have provisions that allow troubled banks to be bailed in using depositor accounts. (…) (Via AdvisorAnalyst)

NEW$ & VIEW$ (1 APRIL 2013)

Posted on April 1, 2013 by Denis Ouellet

The U.S.economy: good but not so good. Weakness persists in Eurozone, spreads elsewhere. Earnings watch. Sentiment watch. Investor indebtedness.

Jobless Claims Higher Than Expected

Like most of this (last) week’s economic indicators, initial jobless claims came in higher than expected today. While economists were looking for claims to come in at 340K, the actual level of claims came in 17K higher at 357K. This is the highest level since February 15th, and the largest weekly increase since late January. With this week’s increase, the four-week moving average of claims rose from a post-recession low of 340.8K up to 343K, so there was not a large impact here.

Consumers Step Up Their Spending

Americans saw bigger paychecks and stepped up their spending last month, despite higher taxes and gas prices, boosting the economy’s growth outlook for the first quarter.

Consumer spending rose 0.7% last month, the Commerce Department said Friday. The gain was the largest since September and prompted several economists to revise upward their growth estimates for the first part of 2013.
Macroeconomic Advisers said it now expects 3.5% growth in the first quarter, up three-tenths of a percentage point from earlier estimates.(…)
Personal income also went up last month, by 1.1%. A driver of that was an 11.9% jump in dividend income, which had dropped even more sharply the month before. Dividend payments were roiled when many companies pulled payments forward into 2012 to avoid higher tax rates.

The fact is that the last several months have be pretty messy as personal income data have been whipsawed by Hurricane Sandy, personal tax rate changes and special dividends. The reality is that with all the turbulence and a big dip in the savings rate, real spending has remained stuck at +2.0% Y/Y while real income has meaningfully slowed from +1.5% between July and October 2012 to +0.6% in January and +0.9% in February.

Consumers will not sustain expenditures much above their disposable income growth rate for very long. In fact, the odds are that they will seek to restore their savings rate back to the 3.5-4.0% range.

Let’s not forget that special dividends were one-offs and benefitted the wealthier segments. On the other hand, the tax rate changes are permanent and hit just about everybody. the next 2 months will be crucial if the U.S. is to avoid another spring soft patch. Selected Dividend Trends – 20 Years (Factset)

US growth revised higher

Fourth-quarter figures point to commercial real estate revival

But the quarter was still dragged down by big falls in defence spending and business inventories, both of which analysts regard as temporary, suggesting that underlying growth continued at a slow but steady 2 per cent.
The big change in the latest revision was a much higher estimate of business investment in buildings. The Bureau of Economic Analysis now estimates that it added 0.46 percentage points to the growth rate instead of a previous estimate of 0.16 percentage points before.

But

Economic Indicators Ending March on a Down Note

During the first half of March, we saw a remarkable amount of economic indicators beating estimates. As March comes to an end, however, it looks as if economists have begun to get ahead of themselves. (…) As shown, there were 15 indicators released this week, and 11 of them came in weaker than expected. For comparison’s sake, during the weeks of 3/4 to 3/8 and 3/11-3/15, there were 30 indicators released and 24 of them came in better than expected.

CHICAGO ISM DECLINES 4.4 TO 52.4

The important stuff is that new orders dropped from an average of 59.2 in Jan-Feb to 53.0 in March and that order backlogs fell back to 45.0.

The Richmond and Philly Fed surveys were also uninspiring in March. This week, we get the final PMIs for the U.S. The flash PMI was pretty strong so if the final reading comes in weaker, it would mean that the economy is getting softer as we speak. The sequester’s gotta hit at some point.

ACROSS THE POND

Record fall in French sales weighs on Eurozone retail sector in March

The downturn in the Eurozone retail sector gathered momentum at the end of the first quarter, Markit’s retail PMI® data for March showed. The rate of decline in sales in the latest period was the fastest since May 2012, and the trend over the first quarter as a whole was the second-weakest since Q1 2009.

Retail PMI data by country signalled steep falls in sales in both France and Italy, and a broadly stable trend in Germany.

In particular, the month-on-month rate of decline in French retail sales accelerated further to a new survey record (data were first collected in January 2004). Italian sales continued to fall sharply, but at a weaker rate than the trend shown over 2012.

Blow for ECB as wider loan rates hit south

Bank measures fail to ease credit conditions in periphery

(…) Since mid-2012, the spread between yields on Spanish and Italian sovereign 10-year debt and the German equivalent has narrowed significantly. Goldman Sachs’ interest rate divergence indicator – measuring cross-border variations in interest rates charged by eurozone banks on a variety of business loans – also dipped initially.
But the indicator has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals. (…)

France misses 2012 deficit target

Deficit reached 4.8 per cent of GDP

Official figures showed the nominal deficit last year was 4.8 per cent of gross domestic product, overshooting the government’s target of 4.5 per cent. The 2011 deficit was also revised slightly upwards to 5.3 per cent.
The government has already acknowledged it will overshoot this year’s target deficit of 3 per cent previously agreed with the European Commission. With the figure now forecast to hit 3.7 per cent, France is seeking a year’s delay from the commission for reaching the target, the level at which growth in the public debt should stabilise.

Hollande says employers to pay 75% tax rate Switch is attempt to preserve key election pledge

French President François Hollande has moved to preserve his controversial promise to impose a 75 per cent marginal income tax rate by making companies pay the levy.
The president’s original proposal to impose the tax on individuals earning above €1m was in effect blocked by France’s constitutional council and, last week, by the state council, the government’s legal watchdog. (…)
Speaking in a television interview on Thursday, the president said shareholders would have to be consulted on pay and, where a company paid more than €1m, it would have to pay a levy to meet the 75 per cent rate. The measure would last for two years.

ELSEWHERE

S. Korean Output Unexpectedly Falls as Growth Forecast Cut

Output fell 0.8 percent last month from January when it fell 1.2 percent, Statistics Korea said today. (…)

The government cut the 2013 growth outlook from 3 percent to 2.3 percent as South Korean exporters including Samsung Electronics Co. and Hyundai Motor Co. grapple with a won that’s risen 17 percent against the yen in the last year.

South Korea Offers Tax Breaks to Revive Flagging Home Sales

South Korea will give tax breaks to home buyers and cut borrowing costs as the government seeks to revive home sales that tumbled to the lowest level since 2006, threatening a rebound in Asia’s fourth-largest economy.
First-time home-buyers with annual income less than 60 million won ($53,900) will be exempted this year from taxes on property purchases worth no more than 10 times their salary, according to a government statement. Multiple-home owners will see rules relaxed on capital-gains taxes. (…)
Transactions fell 14 percent to 47,288 in February, the least for that month in seven years, according to the land ministry. Prices are also sliding, with values in Seoul lower than any time since March 2008. January’s total of 27,070 home transactions was the second-lowest for any month dating back to 2006, when the data was first released, land ministry data show.

MEANWHILE, DR. COPPER IS WEAK

Stocks, Commodities Part Ways

Commodities have posted their worst first quarter since 2010. The Dow Jones Commodity Index, which tracks commodities ranging from oil to corn, is down 1.1% in the period. The S&P GSCI commodities index, which also follows a variety of commodities but has more exposure to energy prices, has performed slightly better, rising 1.5%.

CHINA BACK IN GEARS? CEBM’s survey suggests that the economy has picked up moderately in late March.

Respondents from the cement and construction machinery sectors reported above-expectations sales data. Some respondents reported that most construction projects had resumed during the last two weeks of March, which has led to improving demand. Most respondents from the cement sector indicated that the current demand recovery is stronger than last year. In addition, sales of construction machinery also exceeded expectations, and utilization hours also improved. Most respondents from the machinery sector believe that the demand recovery was later than previous years due to leadership transitions at central and local governments.

However, demand recovery for steelmakers and machinery tool manufacturers remained relatively weak, as 45% of surveyed steelmakers reported increasing inventory levels of finished goods. Auto sales were also below expectations, and automakers became more cautious as a result.

Japan’s Business Pessimism Shows Challenges for Kuroda: Economy

The quarterly Tankan for large manufacturers was at minus 8 in March, rising from minus 12 in December, the central bank said in Tokyo today, as companies said they’ll cut investment by the most since the global recession.

Turkey’s economy slows sharply Data highlight Turkish government unease with central bank policy

Russian Fourth-Quarter Growth Probably Fell to 3-Year Low

EARNINGS WATCH

Q1’13 earnings season is about to begin.

March was a relatively quiet month for guidance from S&P 500 companies, as just eight companies issued quarterly EPS guidance for Q1 2013 and 22 companies issued annual EPS guidance for the current fiscal year during the month.
If 78% is the final percentage, the Q1 2013 quarter will have the highest percentage of companies issuing negative EPS guidance since FactSet began tracking the data in Q1 2006. (Factset)

Pointing up The only silver lining in the above table is that March was a quiet month for quarterly negative guidance. However, as Factset points out, negative annual guidance has stepped up in recent weeks.

For the current fiscal year overall, 168 companies have issued negative EPS guidance and 77 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for the current fiscal year stands at 69%. This marks the third consecutive month that the percentage of negative EPS guidance has increased, as companies in the index transition to issuing annual guidance for 2013 as the new current fiscal year (instead of 2012).

Hmmm…

SENTIMENT WATCH

S&P Milestone Marks Embrace of Stocks

(…) Individual investors, who have spent the better part of the last several years shunning U.S. stocks, are showing signs of returning to the market. So far this year, U.S. stock-focused mutual funds—excluding exchange-traded funds—have taken in $32.6 billion, according to Lipper. Investors had pulled a net $445 billion from domestic stock mutual funds from 2007 through the end of 2012. (…)

“Despite the recent rise in equity markets, we believe an enormous gap exists between the apparent bullish consensus on equities and effective low positioning in equity markets,” Didier Duret, chief investment officer for the private bank of Dutch financial services giant ABN Amro, told clients last week. Mr. Duret increased his exposure to stocks, particularly riskier ones with more growth potential.

I wonder if Mr. Duret reads Doug Short who recently graphed the current level of investor leverage:

The chart below illustrates the mathematics of Credit Balance (the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt) with an overlay of the S&P 500.

Hmmm…

And now this:

Betting the House on the Stock Market

Lenders say a growing number of luxury homeowners are turning to a prerecession tactic of withdrawing equity from their homes. And just like during the housing bubble, many of these affluent borrowers aren’t using this cash to renovate their homes. Instead, they’re pumping it into investments, including the stock market, other real-estate purchases or even using the money to purchase art, which they expect will generate large returns going forward. In other cases, they’re choosing to use this cash to pay for their children’s college tuition or other expenses that they’d otherwise finance with higher-interest debt.

Bullish Sentiment Unchanged This Week

The “Not-So-Great Rotation”

(…) Fund flow data has yet to show a large-scale shift away from bonds, even as rates rose in the early part of the year. ICI data shows that the net new investment of $53 billion in bond mutual funds in the first two months of this year slightly exceeds the $52 billion for stock funds. The steady continuing demand for debt held up in January and February despite respective annualized losses of 1.7% and 0.8% for Treasuries and investment grade corporate debt in the Barclays indices. The hangover from the last market crash and the increasing popularity of ETFs has produced a cumulative $467 billion worth of outflows from stock mutual funds in the past five years. During that same period, $1.1 trillion worth of net new investment went into bond funds, as global investors retained a strong premium for US dollar debt.

A subset of the fund flow data that tracks changing asset allocations shows only marginal evidence of an investor shift from bonds to stocks. The total monthly flows sum up the cash going into or out of funds and the net exchanges of one type of fund for another. Year-to-date net exchanges out of bond funds and into other fund classes of $4 billion are nearly mirrored by $5 billion in flows into stock funds from other funds (…)

Rather than siphoning assets from bonds, cash for equities has come in large part from money market funds. Total current retail and institutional money market funds outstanding of $2.4 trillion represents a dramatic fall from its 2009 peak of $3.6 trillion. (…) If investor psychology continues to heal in the wake of two sharp market crashes in the past dozen years, the $11 trillion sitting in money funds and bank deposits is a more likely source than bond holdings for stock investment.

NEW$ & VIEW$ (5 MARCH 2013)

Posted on March 5, 2013 by Denis Ouellet

Eurozone retail sales rise in January but beware February. Europe car sales plummet. Eurozone fiscal rules: firm but flexible. Sentiment watch. Watch corporate bonds.

EUROZONE RETAIL SALES UP 1.2% IN JANUARY

Sales volumes rose 1.2% in one of the slowest month of the year after declining 0.8% in December. Nevertheless, the 3 month growth of 0.6% (2.5% a.r.) sure beats the previous 3 month 1.6% drop (-6.6% a.r.). Core sales did even better with a 2.0% gain in January after 4 consecutive declines totaling 3.0%.

High five That said, Markit’s latest retail PMI for the Eurozone signaled a sharp decline in February, as reported in my Feb. 28 New$ & View$:

Markit’s Eurozone retail PMI® data for February signalled a record year-on-year fall in retail sales revenues in the single currency area. Sales were also down sharply compared with January, as signalled by a PMI reading of 44.5, down from 45.9.

Retail PMI data by country signalled a broad-based downturn in sales revenues in February. Germany registered a fourth decline in sales in the past seven months, while French retail sales fell for a survey-record eleventh consecutive month and at the fastest pace since last August. Italy continued to show the strongest overall decline, albeit the weakest since last September.

German car sales plunge as Europe’s auto crisis deepens

New car sales in Germany fell by more than 10 percent year-on-year in February, signaling the crisis for Europe’s auto makers is deepening as recession-hit consumers curb spending.
The data, which comes as executives gather for Wednesday’s opening of the Geneva Car Show, follows an 8.5 percent decline in new car registrations in Europe’s largest economy in January. (…)
Germany continues to outperform markets such as France and Italy, where car registrations tumbled 12 percent and 17 percent respectively in February.(…)
German car sales fell 2.9 percent in 2012, including a 16 percent drop in December.

EUROZONE FISCAL RULES: FIRM, BUT FLEXIBLE…

EU Opens Way for Easier Budgets After Backlash

European finance ministers opened the way for looser budget policies after a backlash against austerity thrust Italy into political limbo and shattered months of relative stability in European markets.
Italy’s deadlocked election, France’s refusal to make deeper budget cuts and protests against the shrinking of the welfare state across southern Europe escalated the rebellion against the German-led prescription for fighting the debt crisis.
Economic strains “may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits,” European Union Economic and Monetary Commissioner Olli Rehn told reporters late yesterday after a meeting of euro- area finance ministers in Brussels.

SENTIMENT WATCH

In the same FT: good news…

Shares rebound as China sticks to targets

Sentiment improves as investors bet on further easing

(…) But the SCI has recovered by 2.3 per cent after Beijing maintained its economic growth target at 7.5 per cent while lowering its inflation goal to 3.5 per cent as the National People’s Congress opened on Tuesday.

…not so good news:

Wen issues China growth warning

Outgoing premier says 7.5% GDP target will be ‘hard to attain’

Warning signs for US corporate bonds

Debt looks expensive and borrowers are paying higher premiums

Could the bond boom be turning? Warning signs are flashing as investors demand higher yields even on US bonds issued by the world’s largest and safest corporate borrowers.
In recent weeks, big investment grade bond issues by the likes of Philip Morris International and UnitedHealth Group have been sold at higher yields than the levels their older bonds were trading at in the secondary market.

NEW$ & VIEW$ (28 FEBRUARY 2013)

Posted on February 28, 2013 by Denis Ouellet

U.S. durable goods orders jump. Pending home sales rise. Eurozone slump to continue. Is the sell-off in materials overdone? Global IP. A new bull market for the dollar? The U.S. energy revolution.

U.S. DURABLE GOODS ORDERS JUMP

Forget the 5.2% decline in total new orders. The important stats are:

New orders ex-transportation (-19.8% in January) rose 1.9% in January after rising 1.0% and 1.2% in the previous 2 months respectively. That’s almost 18% annualized for the last 3 months.
Orders for non-defense capital goods ex-aircrafts jumped 6.3% in January after -0.3% in December and +3.3% in November. That’s 44% annualized! This series is now +4.7% Y/Y after edging down 0.5% in 2012. (Chart from IBD, table from Haver Analytics)

U.S. Pending Home Sales Recover To Highest Since 2010

Pending sales of single-family homes jumped 4.5% (9.5% y/y) last month after a revised 1.9% December decline, according to the National Association of Realtors (NAR).

Euro-Zone Slump Set to Continue

The euro-zone economy appears unlikely to emerge this quarter from a contraction that has already lasted for nine months, despite a low rate of unemployment in Germany, its largest member.

The Centre for Economic Policy Research and the Bank of Italy Thursday said their Eurocoin indicator—which is intended to estimate quarter-on-quarter growth in gross domestic product—showed the euro-zone economy shrank again in February, although at a slower pace than in recent months.

Credit is the lifeblood of an economy. While U.S. bank loans have turned Y/Y positive in early 2011, Eurozone loans are showing little vital signs if any. France economy is turning for the worse, Spain in nowhere near water level and Italy can only sink further with its messy politics. Germany can only weaken with such weak “partners”. Meanwhile, lending standards are tightening!

U.S. BANK LOANS

FRED Graph

Record year-on-year fall in Eurozone retail sales in February (Markit)

Markit’s Eurozone retail PMI® data for February signalled a record year-on-year fall in retail sales revenues in the single currency area. Sales were also down sharply compared with January, as signalled by a PMI reading of 44.5, down from 45.9.

Retail PMI data by country signalled a broad-based downturn in sales revenues in February. Germany registered a fourth decline in sales in the past seven months, while French retail sales fell for a survey-record eleventh consecutive month and at the fastest pace since last August. Italy continued to show the strongest overall decline, albeit the weakest since last September.

All three countries registered stronger year-on-year falls in retail sales in February. The annual rates of decline in Germany, France and Italy were the sharpest in 34, nine and two months respectively.

Faced with declining sales, retailers made further cuts to purchases of new stock in February. The value of new purchases fell for the nineteenth
successive month, and at the fastest rate since last June. Consequently, the value of goods held in stock at retailers declined for the sixth month running, and at the strongest pace in over three years.

European Recovery Path in Danger as Politics Menace Growth The euro region’s path to recovery is facing a new challenge from Italy’s political stalemate.
German Jobless Unexpectedly Declines on Growth Revival: Economy German unemployment unexpectedly fell in February amid signs that Europe’s biggest economy is returning to growth after a contraction at the end of last year.

The number of people out of work fell a seasonally adjusted 3,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said today. The adjusted jobless rate held at 6.9 percent this month after the January rate was revised up from an initially reported 6.8 percent.

IS THE SELL-OFF IN MATERIALS OVERDONE?

Materials are down 5% in the past month. Myles Zyblock, RBC Capital’s strategist believes that

the sell-off appears to be an over-reaction given the sharp acceleration in Chinese money metrics and the ongoing upturn in global leading economic data. We believe that base metals, chemicals and agriculture are likely to offer leadership in the resource space given the profile of leading indicators.

This excellent strategist offers two charts to support his expectation.

Myles adds the following chart reflecting the tight inverse correlation between Materials and the U.S. dollar, probably hoping that the dollar’s rally will soon reverse. Fingers crossed

Materials are indeed highly inversely correlated to the U.S. dollar (read below) but they also need demand momentum which can be monitored through the trends in industrial production across the world. Outside the U.S., IP trends are not buoyant.

U.S. IP Y/Y GROWTH FRED Graph

JAPAN IP FRED Graph

GERMAN IP FRED Graph

U.K. IP FRED Graph

FRANCE IP FRED Graph

BRAZIL IP FRED Graph

ITALY IP FRED Graph

RUSSIA IP FRED Graph

KOREA IP FRED Graph

I am missing China, a big piece admittedly. China’s IP continues to grow but the rate of growth, currently in the 10% range is nowhere near the 15-20% growth rates pre-2011.

Japan’s Industrial Output Rises as Yen Boosts Export Outlook

Output climbed 1 percent from December, when it rose 2.4 percent, the Trade Ministry said in Tokyo today. The ministry said that increases in production of cars and memory chips contributed to the overall gain in the month.

Of the 138 companies on the Nikkei 225 Stock Average for which Bloomberg News has estimates, almost 64 percent beat earnings estimates for the most recent quarter, as a weaker yen pushes up profits.

Back to the weak dollar hope. I am no forex expert but there are signs out there suggesting that the dollar may in fact be about to rise. Excerpts from a good analysis by George Magnus, UBS.

A U.S. DOLLAR BULL MARKET?

(…) If history is anything to go by, and the nascent signs of economic healing in the US become more convincing, the US dollar could yet rise significantly further over the next two to three years, perhaps reaching 120- 130 against the Japanese Yen, and parity to 1.05 against the Euro. More than likely, many emerging countries will be prepared to allow their currencies to decline against the US dollar too.

(…) according to the Congressional Budget Office, the budget deficit under current laws will drop to under $500 billion in 2013, or 5.3% of GDP, the lowest since 2008. The central forecast, based on an undemanding GDP growth rate, is that it will continue to drop to 2.4% of GDP by 2015.

The CBO notes that the real fiscal and debt sustainability issues for the US are unlikely to become pressing until later in the decade and the 2020s. If the deficit should halve in the next two years, as suggested, sentiment in US capital markets is likely to be buoyed, for a while at least.

A higher US dollar, and an increase in US real interest rates would mark a significant shift in the financial and investment environment. But the most challenging implications might be for emerging markets and industrial commodity prices, both of which have prospered during the US dollar downwave since 2001. The two previous US dollar bull markets since the collapse of Bretton Woods, from 1978-1985, and from 1992-2001, had a detrimental effect on Latin America, and Asia, respectively. (…)

There are no grounds for complacency, of course, but several other parts of the US economic and financial kaleidoscope seem to be slowly falling into place. Nominal GDP growth from the trough in 2009 to the end of 2012 had moved up to 4%. The housing sector has stabilised, capital spending by companies is contributing more to GDP growth, and non farm payroll jobs have averaged a little over 150,000 per month for two years, topping 200,000 in the fourth quarter 2012.

(…) And if the economy remains on a growth path of around 2-3%, the debate about QE exit strategies will gather relevance this year and next, not least in the expectations of US bond investors. If US bond yields rise to reflect more robust expectations of a turn away from QE because of the return of selfsustaining growth, they are likely to pull the US dollar higher. (…)

From a more structural standpoint, there has been a lot of conjecture about the path towards US energy independence, courtesy of growing domestic energy output and foreign sales of natural gas and oil. (…) But whether or not the US achieves independence any time soon, the steady decline in the energy trade deficit is already fact.

And similarly, the US technological lead in advanced manufacturing is an asset that should stand it in good stead for a long time to come, as cost structures decline, sharpening the country’s competitive edge and providing incentives to create output and jobs at home.

Even if you want to reserve judgment about the prospects for US fiscal politics, energy independence, and leadership in advanced manufacturing, the US dollar may still appreciate against other major
currencies. The US economy is, relatively speaking, in better cyclical and
structural shape, the Fed will likely be the first central bank to exit QE, and the US dollar faces weak competition in the rest of the developed world. (…)

And this from Bill Gross in today’s FT:

Sell currencies of serial QE offenders

(…) How should an investor respond? Respect the drone, I suppose, and don’t fight the central bank in the immediate term.
In currency terms, one has only to observe the 15 per cent depreciation of the yen against the dollar and its 20 per cent depreciation versus the euro without a shot even being fired. Japan’s Prime Minister Shinzo Abe has one-upped Federal Reserve Chairman Ben Bernanke simply with a promise to print.
Instead of Big Mac prices, then, or money in/money out trade and investment flows, investors and market speculators should analyse promises, observe QE purchases as a percentage of gross domestic product or outstanding debt, and sell the most serial offender or obsessive-compulsive printer.
The yen is a first choice, the pound a close second based on incoming Bank of England governor Mark Carney’s inaugural addresses, with the euro holding up the rear. European Central Bank President Mario Draghi may promise to support the euro, but to date that hasn’t meant printing many of them.
Once an investor has picked winners and losers based upon the increasing size of a central bank’s balance sheet, however, he or she should understand that all of these QE bullets are reflationary attempts that may produce a semblance of real growth, but rather more inflation in future years.
Unless there is a white flag or an ultimate ceasefire, money printing lowers the value of all global currencies – much like horsemeat lowers the value of any burger or shepherd’s pie.

Talking of the U.S. energy revolution:

Gas Boom Projected to Grow for Decades

U.S. natural-gas production will accelerate over the next three decades, research indicates, a further sign the energy boom remaking America will be long-lived

The most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that.
The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43. (…)
The shale-gas boom has led to a reorientation of the U.S. energy economy. This has led to a steep decline in coal consumption for electric generation and prompted companies to announce or consider multibillion-dollar investments to export gas and build chemical, steel and fertilizer plants that will consume enormous quantities of gas.

Exponential growth in ‘Saudi Texas’ oil; output has doubled over last 3 years and completely reversed a 23-year decline (Carpe Diem)

The Energy Information Administration released new data today for US oil production by state through the end of last year, and its report showed that “Saudi Texas” produced an average of 2.22 million barrels per day (bpd) in December, the highest average daily output in the state in any month since June 1986, more than 26 years ago. Texas oil production increased by 30% in December from a year earlier, and by 73% from two years ago.

Amazingly, oil production in the Lone Star State has doubled in only three years, from 1.1 million bpd in January 2010 to 2.22 million bpd in December 2012, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. (…)