NEW$ & VIEW$ (31 JANUARY 2014)

U.S. Banks Loosen Loan Standards Big banks are beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing that could underpin a brightening economic outlook.

(…) In both the U.S. and Europe, new reports released Thursday show banks are slowly starting to increase their appetite for risk. The U.S. Office of the Comptroller of the Currency said banks relaxed the criteria for businesses and consumers to obtain credit during the 18 months leading up to June 30, 2013, while the European Central Bank said fewer banks in the euro zone were reporting tightened lending standards to nonfinancial businesses in the fourth quarter of 2013.

(…)  The comptroller’s report said it would still classify most banks’ standards as “good or satisfactory” but did strike a cautionary tone. (…)

An upturn in bank lending, if taken too far, could also lead to inflation. The Fed has flooded banks with trillions of dollars in cash in its efforts to boost the economy. In theory, the printing of that money would cause consumer price inflation to take off, but it hasn’t, largely because banks haven’t aggressively lent out the money. (…)

John G. Stumpf, CEO of Wells Fargo & Co., said on a Jan. 14 conference call with analysts that he is “hearing more, when I talk with customers, about their interest in building something, adding something, investing in something.”

Kelly King, chief executive of BB&T Corp., told analysts two days later, “we really believe that we are at a pivotal point in the economy…admittedly that’s substantially intuitive.” (…)

The comptroller’s survey found more banks loosening standards than tightening. The regulator said that in the 18 months leading up to June 30, 2013, its examiners saw more banks offering more attractive loans.

The trend extended to credit-card, auto and large corporate loans but not to residential mortgages and home-equity loans. (…)

The OCC’s findings are consistent with more recent surveys: The Fed’s October survey of senior U.S. loan officers found a growing number loosening standards for commercial and industrial loans, often by narrowing the spread between the interest rate on the loan and the cost of funds to the bank.

The ECB’s quarterly survey, which covered 133 banks, showed that the net percentage of euro-zone banks reporting higher lending standards to nonfinancial businesses was 2% in the fourth quarter, compared with 5% in the third quarter. (…)

 

U.S. Starts to Hit Growth Stride

A potent mix of rising exports, consumer spending and business investment helped the U.S. economy end the year on solid footing.

Gross domestic product, the broadest measure of goods and services churned out by the economy, grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter, the Commerce Department said. That was less than the third quarter’s 4.1% pace, but overall the final six months of the year delivered the strongest second half since 2003, when the economy was thriving.

Growth Story

A big driver of growth in the fourth quarter was a rise in consumer spending, which grew 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity.

The spike in Q4 consumer spending is very surprising, and suspicious. Let’s se how it gets revised.

Consider these nest 2 items:

(…) For the 14-week period ending Jan. 31, Wal-Mart expects both Wal-Mart U.S. and Sam’s Club same-store sales, without fuel, to be slightly negative, compared with prior guidance. It previously estimated Wal-Mart U.S. guidance for same-store sales to be relatively flat, and Sam’s expected same-store sales to be between flat and 2%.

A number of U.S. retail and restaurant companies have lamented poor winter weather and aggressive discounts, resulting in fewer store visits and lower sales. Many of those companies either lowered their full-year expectations or offered preliminary fourth-quarter targets that missed Wall Street’s expectations.

Wal-Mart warned the sales impact from the reduction in the U.S. government Supplemental Nutrition Assistance Program benefits that went into effect Nov. 1 was greater than expected. The retailer also said that eight named winter storms resulted in store closures that hurt traffic throughout the quarter.

Wal-Mart Stores Inc. warned that it expects fourth-quarter earnings to meet or fall below the low end of its prior forecast, citing government cuts to assistance programs and the harsh winter weather.

Amazon earned $239 million, or 51 cents a share, on sales that were up 20% at $25.59 billion. The 51 cents a share were far below Street consensus of 74 cents, and the $239 million profit on $25 billion in sales illustrates just how thin the company’s margins are.

A year ago, Amazon earned $97 million, or 21 cents a share, on sales of $21.29 billion.

The company also forecast first-quarter sales of $18.2-$19.9 billion; Street consensus was for $19.67 billion. In other words, most of that projection is below Street consensus.

It projected its net in a range of an operating loss of $200 million to an operating profit of $200 million.

Surprised smile AMZN earned $239M in 2013 and projects 2014 between –$200M and +$200M. You can drive a truck in that range. But how about the revenue range for Q1’14:

Net sales grew 20 percent to $25.6 billion in the fourth quarter, versus expectations for just above $26 billion and slowing from the 24 percent of the previous three months.

North American net sales in particular grew 26 percent to $15.3 billion, from 30 percent or more in the past two quarters.

Amazon also forecast revenue growth of between 13 and 24 per cent in the next quarter, compared to the first quarter 2013.

Notwithstanding what that means for AMZN investors, one must be concerned for what that means for U.S. consumer spending. Brick-and-mortar store sales have been pretty weak in Q4 and many thought that online sales would save the day for the economy. Amazon is the largest online retailer, by far, and its growth is slowing fast and its sales visibility is disappearing just as fast.

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Back to AMZN itself, our own experience at Christmas revealed that Amazon prices were no longer systematically the lowest. We bought many items elsewhere last year, sometimes with a pretty large price gap with Amazon. Also, Amazon customers are now paying sales taxes in just about every states, closing the price gap further. And now this:

To cover rising fuel and transport costs, the company is considering a $20 to $40 increase in the annual $79 fee it charges users of its “Prime” two-day shipping and online media service, considered instrumental to driving online purchases of both goods and digital media.

“Customers like the service, they’re using it a lot more, and so that’s the reason why we’re looking at the increase.” Confused smile

U.S. Pending Home Sales Hit By Winter Storms

The National Association of Realtors (NAR) reported that December pending sales of single-family homes plunged 8.7% m/m following a 0.3% slip in November, revised from a 0.2 rise. It was the seventh consecutive month of decline.

Home sales fell hard across the country last month. In the Northeast a 10.3% decline (-5.5% y/y) was logged but strength earlier in the year lifted the full year average by 6.2%. Sales out West declined 9.8% (-16.0% y/y) and for the full year fell 4.1%. Sales down South posted an 8.8% (-6.9 y/y) falloff but for all of 2013 were up 5.4%. In the Midwest, December sales were off 6.8% (6.9% y/y) yet surged 10.4% for the year.

Punch Haver’s headline suggests that weather was the main factor but sales were weak across the U.S. and have been weak for since the May taper announcement.

Mortgage Volumes Hit Five Year Low The volume of home mortgages originated during the fourth quarter fell to its lowest level in five years, according to an analysis published Thursday by Inside Mortgage Finance, an industry newsletter.

(…) Volumes tumbled by 19% in the third quarter, fell by another 34% in the fourth quarter, according to the tally. (…)

Overall originations in 2013 stood at nearly $1.9 trillion, down nearly 11% from 2012 but still the second best year for the industry since the mortgage bust deepened in 2008. The Mortgage Bankers Association forecasts originations will fall to $1.1 trillion, the lowest level in 14 years.

The report also showed that the nation’s largest lenders continued to account for a shrinking share of mortgage originations, at around 65.3% of all loans, down from over 90% in 2008.

Euro-Zone Inflation Returns to Record Low

Annual inflation rate falls to a record low in January, a development that will increase pressure on the ECB to act more decisively to head off the threat of falling prices.

The European Union’s statistics agency said Friday consumer prices rose by just 0.7% in the 12 months to January, down from an 0.8% annual rate of inflation in December, and further below the ECB’s target of just under 2.0%.

Excluding energy, prices rose 1.0%, while prices of food, alcohol and tobacco increased 1.7% and prices of services were 1.1% higher.

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Pointing up Figures also released Friday showed retail sales fell 2.5% in Germany during December. The result was far worse than the unchanged reading expected from a Wall Street Journal poll of experts. In annual terms, retail sales fell 2.4%, the data showed. It was the first annual decline in German sales since June.

Consumer spending also fell in France as households cut purchases of clothes and accessories, although by a more modest 0.1%.

Benchmark Japan inflation rate hits 1.3%
December figure brings Bank of Japan closer to 2% goal

Average core inflation for all of 2013, a measure that excludes the volatile price of fresh food, was 0.4 per cent, according to the interior ministry. (…)

Much of the inflation so far has been the result of the precipitous fall in the yen that took hold in late 2012, making imports more expensive. Energy prices, in particular, have risen sharply: Japan buys virtually all of its oil and gas abroad, and the post-Fukushima shutdown of the country’s nuclear industry has further increased the need for fossil fuels.

So-called “core-core” consumer prices, which strip out the cost of both food and energy, rose by 0.7 per cent in December.

SENTIMENT WATCH

Individual Investors Head For the Hills

(…) In this week’s poll, bullish sentiment declined from 38.12% down to 32.18%.  This represents the fourth weekly decline in the five weeks since bullish sentiment peaked on 12/26/13 at 55.06%.  While bullish sentiment declined, the bearish camp became more crowded rising from 23.76% to 32.76%.  

With this week’s increase, bearish sentiment is now greater than bullish sentiment for the first time since mid-August.  The most interesting aspect about these two periods is what provoked the increase in cautiousness.  Back then it was concerns over Syria that were weighing on investor sentiment.  Fast forwarding to today, the big issue weighing on investors’ minds is now centered on Syria’s neighbor to the North (Turkey).  For such a small area of the world, this region continues to garners a lot of attention.

THE JANUARY BAROMETER (Contn’d) Sleepy smile

January Slump Is Nothing to Fret Over

The old Wall Street adage — as January goes, so goes the rest of the year – needs to be put to rest.

Since 1950, there have been 24 years in which the S&P 500 fell in January, according to Jonathan Krinsky, chief market technician at MKM Partners. While the S&P 500 finished 14 of those years in the red, a look at the performance from February through the end of the year provides evidence to buoy investors. In 13 of those 24 years, stocks rose over the final 11 months.

“All else being equal, a down January is less than 50% predictive that the rest of the year will close lower than where it closed in January,” Mr. Krinsky said. (…)

Long time reader Don M. sent me even better stuff on the January Barometer. Hanlon Investment Management must have had many clients asking about that since they made a thorough analysis of the “phenomenon”. Here it is for your Super Bowl conversation:

(…) What was found is that from 1950 until 1984, years where the month of January saw a positive return were predictive of a positive return for the entire year with approximately 90% probability.  The years with a negative return in January were predictive of a negative return for the year approximately 70% of the time. 

In the intervening time since 1984, market action has caused the predictive power of negative returns in January to fall to around 50%, which is nothing more than chance.  However, positive returns in January have still retained their predictive power for positive returns for the year.

Yet still, there is another group of people who advocate that just the first five trading days of January are predictive of the rest of the year.  We took data from 1950 through 2013 for the S&P 500 Index and then calculated both positive and negative results on a weekly and monthly basis.

For the 64 years from 1950 through 2013, a positive return in January was predictive of a positive return for the year 92.5% of the time.  A positive return during the first five trading days of January was predictive of a positive return for the year 90.0% of the time.  A negative return in January was predictive of a negative return for the year 54.2% of the time-basically not predictive at all.  A negative return during the first five trading days of January was predictive only 50% of the time, amounting to nothing more than a flip of a coin.

But what if we filter the results by requiring both a positive return during the first five trading days of January and a positive return in January for a positive signal?  Conversely, we may require a negative return during the first five trading days of January and a negative return for January to generate a negative signal.   When the first week and the month of January both have positive returns, then the signal is predictive 93.5% of the time for a positive year: a slight improvement over 92.5%.

Even more interesting is that when you require both a negative return in the first week and a negative return in January to give a signal.  Though the number of signals is reduced from 24 to 15, the success ratio improves from 54.2% to 73.3%.  The median and average returns for predicted years are listed in the summary statistics table, along with their respective success percentages, on the following page.  This will give you a something to ponder as we begin 2014.

How about negative first week and positive month? And what’s wrong with the last five days of January? Then insert the result of the Super Bowl. There you go!

Thanks Don.

Investors pull billions from EM stocks Dedicated EM funds hit as equity outflows reach highest since 2011 (Via FT Alphaville)

SocGen’s cross-asset research team believes that when it comes to EM outflows they may have only just begun:

As the team notes on Friday, this is especially so given the Fed doesn’t appear to care about the EM sell-off:

Since cumulative inflows into EM equity funds reached a peak of $220bn in February last year, $60bn of funds have fled elsewhere. Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity (see chart below). EM bond funds face a similar fate. For reasons discussed in our latest Multi Asset Snapshot (EM assets still at risk – don’t catch the falling knife), we see no early end to EM asset de-rating. Furthermore, the Fed remains assertive on execution of tapering despite recent turmoil within the EM world, which spells more turbulence ahead.

And if it keeps going, balance of payments issues could emerge as a result:

A close look at Global EM funds indicates that all EM markets are suffering outflows Mutual fund and ETF investors in EMs both favour global EM funds. Regional or country specialisation is less common (less than 47% of global EM assets). The implication is that all EM markets face outflows currently, with little discrimination between the countries that are most exposed and those which are more defensive. We think Balance of Payment issues may emerge as an important factor going forward.

Though, what is EM’s loss seems to be Europe’s gain at the moment:

Europe reaps the benefits While current EM volatility is impacting developed markets as well, some of the flows are being redirected toward Europe, notably into Italy, Spain and the UK.

The notable difference with taper tantrum V.2, of course, is that US yields are compressing:

Which might suggest that what the market got really wrong during taper tantrum V.1, was that a reduction in QE would cause a US bond apocalypse. This was a major misreading of the underlying fundamentals and tantamount to some in the market giving away top-quality yield to those who knew better.

Taper at its heart is disinflationary for the US economy, and any yield sell-off makes the relative real returns associated with US bonds more appealing.

That taper V.2 incentivises capital back into the US, at the cost of riskier EM yields, consequently makes a lot of sense.

Though, this will become a problem for the US if the disinflationary pressure gets too big.

 

NEW$ & VIEW$ (17 JANUARY 2014)

Philly Fed Stronger Than Expected

Following on the heels of yesterday’s stronger than expected Empire Manufacturing report, today’s release of the Philly Fed Manufacturing report for January also came in stronger than expected.  While economists were looking for the headline index to come in at a level of 8.7, the actual reading was slightly higher at 9.4, which was three 3 points higher than the reading for December.

As shown, the majority (5) of components increased this month, while just three declined.  The biggest increases this month came from Number of Employees and Unfilled Orders.  The fact that Number of Employees increased seems to provide more evidence that last Friday’s employment report was an outlier.  On the downside, the biggest declines were seen in Inventories, Average Workweek, and New Orders.  Believe it or not , the 35.6 decline in the Inventories index was the largest month to month drop in the history of the survey (since 1980).  While that drop is large for one month, it takes that index back to levels seen as recently as April.

Homebuilder Sentiment Slips

Homebuilder sentiment for the month of January slipped from a revised reading of 57 down to 56 (expectations were for 58).  While sentiment slipped, it is important to note that any reading above 50 indicates optimism among homebuilders.

The table to the right breaks out this month’s report by components and region.  As shown, Present Sales, Future Sales, and Traffic all declined this month, with the biggest drop coming in traffic.  (…)

The chart below shows the historical levels of the NAHB Sentiment survey going back to 1985 with recessions highlighted in gray.  The current level of 56 is down slightly from the post-recession high of 58 reached in August.  While the index has seen a remarkable improvement since the lows from the recession, optimism still has some work to do on the upside before getting back to the highs from the prior expansion.

INFLATION WATCH

So while everybody is talking deflation risk:

  • Core CPI rose at a 1.8% annualized rate in Nov-Dec. and is up 1.7% YoY.
  • Same with the Cleveland Fed’s 16% trimmed-mean Consumer Price Index .
  • The median CPI has accelerated from +0.1% MoM in October to +0.2% in November and to +0.3% in December. The median CPI is up 2.1% YoY in December, unchanged for 6 months.

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The WSJ recently polled economists on a number of items. The tilt towards faster growth is clear:image

Even more interesting is that the WSJ did not bother to enquire about inflation and interest rates. Bernanke really did a fine job!

Shopping Spree Ends in Retail Stocks

A disappointing holiday shopping season has investors dialing back expectations for retail stocks after last year’s big runup in the sector.

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Stores Confront New World With Less Foot Traffic

A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers.

(…) Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.

Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don’t seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak’s data shows. (…)

On Wednesday, J.C. Penney said it planned to close 33 underperforming stores and trim 2,000 positions to focus on locations that generate the strongest profits.

Such closings could accelerate: Leases for big retailers typically last between 10 and 25 years, meaning many were negotiated before e-commerce really took off.

Only 44 million square feet of retail space opened in the 54 largest U.S. markets last year, down 87% from 325 million in 2006, according to CoStar Group, Inc., a real-estate research firm. (…)

NMHC Survey: Apartment Market Conditions Softer in Q4 (CalculatedRisk)

Apartment market conditions weakened a bit in January compared with three months earlier. The market tightness (41), sales volume (41) and debt financing (42) indexes were all a little below the breakeven level of 50, although the equity financing index rebounded to 50. (…)

Although markets are a little looser than in October, this is largely seasonal; overall markets remain fairly tight.

“New supply is finally starting to arrive at levels that will more closely match overall demand. In a few markets, we are seeing completions a little higher than absorptions, but this is likely to be short term in nature. Fundamentally, demand for apartment homes should be strong for the rest of the decade (and beyond) – provided only that the economy remains on track.”

CORPORATE DELEVERAGING

From SocGen via ZeroHedge:

US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers.

Don’t forget that corporate cash is heavily concentrated in just a few companies.

SHELL WOES

 

Shell Warns On Profit

The company said profit would be significantly weaker partly because of higher exploration costs. The warning is rare for an oil major, and marks an inauspicious start to energy earnings reports.

The oil major said it expects to post fourth-quarter earnings of $2.2 billion on a current-cost-of-supplies basis—a figure that factors out the impact of inventories, making it equivalent to the net profit reported by U.S. oil companies—down from $7.3 billion a year earlier. Full-year earnings on a CCS basis are expected to be about $16.8 billion, down from $27.2 billion last year.

Shell blames refining woes for warning Oil group issues first profits warning in 10 years

And the wrap up:

Shell warns of ‘significant’ profit miss

Royal Dutch Shell issued a “significant” profit warning on Friday, detailing across-the-board problems and the extent of the challenges facing the oil major’s new boss Ben van Beurden, who took over two weeks ago.

Now you know! Winking smile

 

NEW$ & VIEW$ (15 JANUARY 2014)

Consumers Spent Solidly in December

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

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

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

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

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

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

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

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

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

Pointing up U.S. Business Inventories Increase Slows

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

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

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

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

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

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

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

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

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

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

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

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

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

Auto Makers Dare to Boost Output

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

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

Some auto makers are already concerned about overcapacity.

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

Magna warns 2014 sales likely below analysts’ estimates

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

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

Jobs Deal Collapses in Senate

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

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

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

HOUSING WATCH

From Raymond James:

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

German GDP Disappoints

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SENTIMENT WATCH

 

The Year-Two Curse

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

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

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

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

 

NEW$ & VIEW$ (10 JANUARY 2014)

China Data Suggest Tepid Pickup in West

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

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

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

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

However:

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

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

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

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

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

Low-End Retailers Had a Rough Holiday

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

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

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

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

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

Thomson Reuters rounds it up:

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

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

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

Banks Cut as Mortgage Boom Ends

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

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

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

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

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

Draghi Says ECB Ready to Act

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

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

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

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

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

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

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

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

Oil Breaking Down

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

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

Ghost SENTIMENT WATCH

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

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

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

Ian McAvity:

image

image

Lance Roberts:

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

Click to View

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

Click to View

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

Click to View

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

 

NEW$ & VIEW$ (8 JANUARY 2014)

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

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

Discounts drive U.S. holiday retail growth: ShopperTrak

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

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

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

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

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

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

Growth Picture Brightens as Exports Hit Record

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

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

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

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

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

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

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

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

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

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

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

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

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

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

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

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

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

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

Euro-Zone Retail Sales Surge

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

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

image

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

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

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

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

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

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

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

Meanwhile:

image

 

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

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

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

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

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

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

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

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

EARNINGS WATCH

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

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

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

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

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

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

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

Record-Setting Cold Hits Eastern U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emerging Markets See Selloff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

NEW$ & VIEW$ (26 DECEMBER 2013)

Signs Point to Stronger Economy

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

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

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

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

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

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U.S. Consumer Spending Up 0.5% in November

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

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

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

cat

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

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

Nerd smile What’s wrong with this chart?

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

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

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Meanwhile, Christmas sales are fuzzy:

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

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But Online Sales Jumped 37% During Weekend

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

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

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

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

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

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

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

Coming back to the slow income growth trends:

 

Mortgage Applications Drop to 13-Year Low

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

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

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

BTW, FYI:

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

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

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

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

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

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

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

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

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

 

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$ (13 DECEMBER 2013)

U.S. Retail Sales Rose 0.7%

Consumers spent more freely in November, buoying hopes that economic growth could accelerate in the months ahead.

Retail sales rose a seasonally adjusted 0.7% in November from October, marking the biggest gain since June, the Commerce Department said Thursday. The prior month’s gain was revised up to 0.6% from 0.4%. (…)

In addition to strong auto sales, the report also showed that consumers spent freely last month on furniture, electronics and building materials. Retail sales were up 4.7% from the same period last year, the largest annual gain since July.

The improvement prompted several forecasters to upgrade their predictions for economic growth in the final three months of the year. Economists at Barclays raised their estimate to a 2.2% annual rate from 2%, while J.P. Morgan Chase economists boosted their forecast to 2% from 1.5%. (…)

 

It Wasn’t Holiday Spending That Boosted Retail Sales

When you just look at categories where people buy gifts, such as electronics, clothing and department stores and even add in online retailers, and exclude car dealers, gas stations and restaurants, sales were up just 2.8% in November from a year earlier. That represents the weakest nonrecession November in at least 20 tears and compares to a 4.7% gain for total retail sales.

(…)  maybe it just means that more people decided to get their holiday shopping done in December. And if that holds true, it means December’s retail sales could be a blockbuster.

Sales of motor vehicles & parts led the increase with a 1.8% gain (10.2% y/y). Furniture & electronics/appliance store sales jumped 1.1% (8.2% y/y) following a 2.2% October surge.

Is The Consumer Slowing Down?

Written by Lance Roberts

(…) The problem with any single data point is that it obscures the trend of the data, as shown in the chart below, which is more telling of the overall strength or weakness of the consumer.  

The chart above is the 12-month average of non-seasonally adjusted retail sales data.  This eliminates all of the questionable gimmickry of the seasonal adjustments to reveal the underlying trend of actual retail sales data.  Surging asset prices have done little to boost retail sales which have stagnated in recent months just above the level which has normally been indicative of recessionary drags in the economy.  (…)

But that helps:image

U.S. Business Inventories Continue to Climb

Total business inventories increased 0.7% in October (3.6% y/y) following a 0.6% September gain. These inventories accompanied a 0.5% rise in business sales (3.9% y/y) after September’s 0.3% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

In the retail sector, inventories advanced 0.8% (6.1% y/y) in October, including a 2.1% jump (11.5% y/y) in motor vehicles. Inventories excluding autos rose 0.2% (3.6% y/y) in October. Inventories of furniture, electronics and appliances rose 0.4% (-1.5% y/y) while building materials slipped 0.2% (+2.7% y/y).

Euro-Zone Jobs Market Stabilizes

The euro-zone jobs market stabilized in the six months to September, according to employment figures, bringing an end to a long decline in the number of people at work in the 17 countries that use the euro.

The European Union’s statistics agency said that on a seasonally adjusted basis, 145 million people were in work across the currency area during the third quarter, a figure unchanged from the previous period. Eurostat also revised its figures for the second quarter, and now calculates that there was no change in employment levels, having previously estimated there was a 0.1% decline.

In Germany, employment levels were up 0.6% on the same period last year, while in Greece they were down 2.9%. Indeed, seven of the euro zone’s members were still experiencing a decline in employment during the three months to September.

Saudi Arabia Exposes OPEC’s Fissures

(…) As The Wall Street Journal’s crack OPEC team reports, Saudi Arabia has essentially promised to steady markets for the past two years. But now, with pressure growing over a possible output cut to steady markets, the Saudis are signaling they are no longer willing to go it alone. (…)

Riyadh sees no reason why it and it alone should have to shoulder the burden of trimming and this week’s apparent withdrawal from its role as swing producer is the clearest sign yet of its deep concern.

This month’s OPEC meeting in Vienna was, on the face of it, a cut-and-dried affair. For reporters, the focus was on Iran more than the collective, as the decision to stand pat on overall production was widely expected.

But behind closed doors great rifts are opening up, with Saudi and its Gulf neighbors in one camp, Iran in another and Iraq in a third. Each has issues, both oil-related and political, with the others. (…)

House Approves Budget Pact

The House passed a budget bill designed to avoid a government shutdown next month and relax spending limits in the next two years.

The bill passed with a wide bipartisan margin, on a vote of 332-94. Voting for the measure were 169 Republicans and 163 Democrats, while 62 Republicans and 32 Democrats voted against.

Approval of the bill, which is expected to pass the Senate next week, clears the way for a less-glamorous stage of budgeting as lawmakers set out to make line-by-line spending decisions before current funding runs out Jan. 15. (…)

“Elections have consequences,”‘ said Mr. Ryan, who was his party’s 2012 vice-presidential nominee.  (…)

There is no guarantee that the bipartisan deal signals the end of brinkmanship or that this episode of bipartisanship will reach into other areas. The most immediate test will be the next month’s work on appropriations legislation, which must be enacted before Jan. 15.

The agreement sets only the overall spending targets for domestic and defense programs: $1.012 trillion in the current fiscal year, which is more than the $986 billion provided in 2013. Spending this year would have been even lower—$967 billion—had the sequester cuts taken effect. Under the deal, it would increase to $1.014 trillion in the year starting next Oct. 1. (…)

Goldman Sachs Goes Against Consensus in Dollar Call

Goldman Sachs Group Inc.’s Thomas Stolper, who correctly predicted the dollar’s slide against the euro this year, is deviating from the consensus that the greenback will be among the best currencies to own in 2014.

The dollar will weaken through 2014, reaching $1.40 per euro for the first time since October 2011, Goldman’s London-based chief currency strategist said. The mean estimate in a Bloomberg survey of 46 contributors is for a 7 percent rally to $1.28 per euro from $1.3758 today.