NEW$ & VIEW$ (10 DECEMBER 2013)

Small Businesses Optimism Up Slightly

Owner sentiment increased by 0.9 points to 92.5, a dismal reading as has
been the case since the recovery started. Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels. Expected business conditions though deteriorated further – lots of dismal views of the economy coming next year. The Index has stayed in a “trading range” between 86.4 and 95.4 since the recovery started, poor in comparison to an average reading of 100 from 1973 through 2007.

Small business optimism report data through November 2013

The net percent of all owners (seasonally adjusted) reporting higher
nominal sales in the past 3 months compared to the prior 3 months was
unchanged at a negative 8 percent. Fifteen percent still cite weak sales as
their top business problem, but is the lowest reading since June 2008. The
net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.

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The pace of inventory reduction continued with a seasonally adjusted net
negative 7 percent of all owners reporting growth in inventories, 1 point
worse than in October. The negative outlook for the economy and real
sales prospects adversely impacted inventory satisfaction. The net percent
of owners viewing current stocks as too low improved only 1 point, to
negative 4 percent in November. Inventories are too large, especially given the poor outlook for sales improvements. The net percent of owners
planning to add to inventory stocks was a net 0 percent (up 1 point), no
new orders for inventory when stocks are excessive compared to expected
sales.

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WEEKLY CHAIN STORE SALES SHOW NO HOLIDAY CHEERS

Sales dropped 1.6% last week after the 2.8% decline the previous week. The growth in the 4-week m.a. is 2.2% YoY. It was 3.0% at the same time last year when the Christmas season sales finished up 3.3% by this measure.

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Smile Americans Regain Some Wealth

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, the highest on record, according to the Federal Reserve.

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The value of stocks and mutual funds owned by households jumped $917 billion last quarter, while the value of residential real estate grew about $428 billion, according to the Fed. (…)

Sad smile Wealthy Go Frugal This Holiday Amid Uneven U.S. Recovery

(…) Coach Inc. has said customers plan to spend less on gifts and that mall traffic fell sharply last month. Analysts predict Nordstrom Inc.’s fourth-quarter sales may grow less than half the year-ago pace of 6.1 percent. Tiffany & Co.’s third-quarter comparable sales in the Americas were barely higher. Even before Black Friday, Saks Inc., Neiman Marcus Group Inc. and Nordstrom offered 40 percent off on many brands. (…)

In early October, Unity Marketing conducted an online survey of 1,200 affluent shoppers. Twenty five percent said they’ll spend less on holiday gifts this year than they did in 2012, while 60 percent said they plan to spend the same. Just 13 percent said they would spend more.

Half the respondents said the financial health of the country is worse now than it was three months ago. (…)

First rise in US mortgage debt since 2008
Consumer spending may support economic growth next year

The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008.

After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9 per cent in the third quarter of 2013, according to new data from the US Federal Reserve. (…)

Total household credit grew at an annualised pace of 3 per cent, a little slower than the growth of nominal GDP, while credit in the business sector expanded at a pace of 7.5 per cent. (…)

Canada’s top 1% take home 10.6% of its income

A first glimpse of how top earners fared in 2011 shows their share of income peaked in 2006 at 12.1 per cent, before the recession walloped the wealthy as investment income and bonuses dried up. However, the share is still higher than when Statistics Canada began tracking incomes in 1982, when it stood at 7.1 per cent. (…)

In the U.S., the income share of the top 1 per cent of earners was 19.7 per cent in 2011, according to economists Emmanuel Saez and Thomas Piketty. By last year, it had grown to about 22.5 per cent – a similar level to both before the recession and the Great Depression. The economists found that incomes for the top 1 per cent grew by nearly a third between 2009 and 2012, compared with 0.4-per-cent growth for the bottom 99 per cent.

In Canada, the threshold to be in the top percentile of earners rose to $209,600 in 2011, up from $207,300 a year earlier in constant dollars. It requires $108,300 to be part of the top 5 per cent, while it takes $84,100 to be in the top decile of earners.

The rich typically pay a higher share of taxes in Canada, although that share has declined in recent years. The top 1 per cent of earners paid 20.8 per cent of the total share of federal and provincial or territorial income taxes, down from 23.3 per cent five years earlier. (…)

The top 5 per cent of earners in Canada held 23.8 per cent of total income in 2011, while the top 10 per cent received 35.1 per cent. The report is based on 2011 tax-file data, which includes incomes from earnings and investments, but is not a measure of total wealth, which includes assets such as housing.

Signs Investment Slowing in China

(…) retail sales beat expectations, while investment lost momentum, a sign of progress toward the consumption-led growth policy makers have sought. Retail sales posted 13.7% annual growth in November, up from 13.3% in October, and auto sales hit a record high. (…)

Overall investment showed signs of slowing in November, though real-estate sales and construction starts were strong. Fixed-asset investment was up 19.9% in the first 11 months of the year, compared with the same period of 2012, just below expectations and lower than the figure for the January-to-October period. (…)

Growth in industrial production, the most closely watched monthly indicator of economic performance, slipped back to 10% on a year-to-year basis in November from 10.3% the previous month. (…)

Auto  China Auto Sales Gain 16% as Japan Automakers Extend Recovery

China’s passenger-vehicle sales rose 16 percent in November as Japanese automakers extended their recovery in the world’s largest auto market.

Wholesale deliveries of cars, multipurpose and sport utility vehicles climbed to 1.7 million units last month, the state-backed China Association of Automobile Manufacturers said today. (…)

Industrywide, total sales of vehicles — including buses and trucks — reached 19.9 million units this year through November, putting China on course to be the first country to ever see 20 million units in annual vehicle sales. (…)

By contrast, Indian passenger-vehicle sales fell 10 percent last month, the third-straight decline, according to data released by the Society of Indian Automobile Manufacturers today.

Ghost  France’s Industrial Production fell 0.3% in October, following a 0.3% decline in September.

SENTIMENT WATCH

over the past 3 weeks a cumulative ~15B flowed into equity mutual funds while-$17B flowed out of Bond Mutual funds. (ISI)

 

NEW$ & VIEW$ (4 DECEMBER 2013)

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

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

Auto CAR SALES NOT AS STRONG AS HEADLINES SUGGEST

 

WSJ:  Brisk Demand Lifts Auto Sales

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

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

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

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


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

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

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

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

Well, not really acceptable to Ford:

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

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

 

More inventory problems:

Inventories Threaten to Squeeze Clothing Stores

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

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

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

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

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

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

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

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

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HOUSING IS ALSO WEAK:

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


Ghost  Romain Hatchuel: The Coming Global Wealth Tax

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

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

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

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

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

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

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

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

Hmmm…

Lightning  EUROZONE RETAIL TRADE TURNS WEAKER, AGAIN

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

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European Stocks Suffer a Setback

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

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

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

BANKING

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

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

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

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

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

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

Detroit’s bankruptcy: pensions beware

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

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

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

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

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

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

 

NEW$ & VIEW$ (22 NOVEMBER 2013)

Philly Fed Weaker Than Expected

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

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

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

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To conclude, Confused smile.

Brent Hits One-Month High; Iran in Focus

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

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

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

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

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

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

Target Shoppers Put Less in Their Carts

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

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

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

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

U.S. Wholesale Prices Fall 0.2%

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

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

ECB’s Praet warns of deflationary pressures in euro zone

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

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

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

 German Business Confidence Increases as Recovery on Track

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

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

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

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

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

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

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

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

TIME TO BE SENTIMENTAL?

Yesterday, I posted on Barclays’ analysis

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

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

 

NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

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

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

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

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

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Consumer Prices Ease Amid Lower Fuel Costs

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

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

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

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

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

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

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

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

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

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

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

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

Existing Home Sales Fall 3.2%

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

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

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

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

Americans Recover Home Equity at Record Pace

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

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

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

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

DRIVING BLIND, TOWARDS THE WALL

Fed Casts About for Bond-Buy Endgame

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

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

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

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

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

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

Millennials Wary of Borrowing, Struggling With Debt Management

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

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

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

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

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

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

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

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

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

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

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

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

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

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

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

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

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Here’s the more interesting part:

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

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GOOD READ: ASSESSING THE PARTY’S DECISIONS

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

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

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

Strong support for entrepreneurs

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

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

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

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

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

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

 

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

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

Hukou reform coming

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

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

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

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

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

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

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

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

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

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

Xi consolidates power

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

 

NEW$ & VIEW$ (15 NOVEMBER 2013)

Empire State Manufacturing Contracts: General Business Conditions Lowest Since January

The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3.

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Shoppers Can’t Shake the Blues

 

Wal-Mart Stores Inc. offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

The downbeat outlook from the world’s largest retailer was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend, putting a further drag on an already sluggish economy.

Kohl’s Corp., a department-store chain that caters to middle-income customers, also reported weak results Thursday and said it scaled back its inventories ahead of the holidays, signaling a lack of confidence in its ability to boost sales. (…)

Wal-Mart lowered its full-year profit forecast on Thursday and warned sales would be flat through the end of January, after sales fell for a third straight quarter at U.S. stores open at least a year. (…)

Even higher-end retailers experienced softness in the third quarter. Nordstrom Inc. reported late Thursday that its profit fell to $137 million from $146 million a year earlier, as sales at stores open at least a year slipped 0.7%. The company attributed part of the decline to a shift in the timing of its big Anniversary Sale, but also saw some weakness.

“We’ve experienced softness in our full line store sales with third quarter results consistent with recent trends but lower than what we anticipated as we started the year,” Blake Nordstrom, the company’s president said on a conference call with analysts. (…)

On Wednesday, Macy’s Inc. delivered strong sales and an upbeat holiday outlook that sent its stock up more than 9%. But the department-store chain is boosting discounts to draw in shoppers even at the expense of profit margins.

Kohl’s said it plans to ratchet up holiday marketing and discounts to bring more people into its stores after it cut its full-year profit outlook Thursday. The department-store chain reported its third-quarter earnings fell 18% as comparable-store sales dropped 1.6%. (…)

The Bentonville, Ark., retailer could face additional pressure on sales from the expiration of a temporary boost in food-stamp benefits. The expiration on Nov. 1 is expected to leave nearly 48 million Americans with $5 billion less to spend this fiscal year, which ends in September, according to the Center on Budget and Policy Priorities. The hit follows the end of a payroll tax break that had saved 2% of consumers’ monthly paychecks.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps, or about $14 billion of the $80 billion the U.S. Department of Agriculture says was appropriated for food stamps in the year ended in September 2012. (…)

“A reduction in gas prices and grocery deflation will help customers stretch their budgets, but they’re still trying to absorb a 2% payroll tax cut, uncertainty over Washington, and a lack of clarity around personal health care costs that are all headwinds,” Mr. Simon said. (…)

U.S. Worker Productivity Climbs

More productive U.S. workers supported faster economic growth in the third quarter, but slower business investment might limit future gains.

Labor productivity, or output per hours worked, increased at a 1.9% annual rate from July through September, the Labor Department said Thursday.

Second-quarter productivity growth was revised down to a 1.8% pace from a previous reading of 2.3%. Productivity held flat from a year ago because the increase in output was matched by an increase in hours worked.

Meanwhile, unit labor costs, a key gauge of inflationary pressure, declined at a 0.6% annual pace last quarter. From a year earlier, unit labor costs are up 1.9%—running ahead of the increase in consumer prices.

Industrial Output Runs Hard to Stay in Place

Industrial production in September returned to where it was before the recession, based on a Fed index. But certain index components are way above or below that level, providing a telling set of statistics about today’s economy.

September’s industrial-production data, which cover the period just before the government shutdown, seemed encouraging at first glance. The index expanded 0.6% over the prior month, well ahead of predictions and the fastest pace in seven months. But the strength lay entirely in utilities output, which makes up a 10th of the index. The sixth-warmest September on record for the contiguous 48 states followed a summer that was milder than the year-ago period. Actual manufacturing production, which comprises three-quarters of the index, rose by just 0.1%.

U.S. Trade Gap Widens as Exports Slip

The U.S. trade deficit widened 8%, as a fall in U.S. exports in September suggests the global economy is struggling to gain traction quickly enough to offset tepid demand at home. (Chart from Haver Analytics)

Exports fell 0.2% while imports rose 1.2%, causing the trade gap to expand for the third-straight month.

The report suggests exports, after rising earlier in the year, slumped during the summer as demand weakened in Europe, Japan and developing economies. The three-month moving average of exports, a reading of the underlying trend, slipped for the first time since May. (…)

U.S. exports to the EU from January through September fell 2.7%, compared with the same period a year earlier. Exports to the U.K. were down 15.1%, and exports to Germany fell by 4.5%.

The European Union accounts for roughly 17% of the market for U.S. exports.

The U.S. is also seeing lower demand from Japan, whose export-driven economy is struggling amid weak overseas demand. U.S. exports to Japan this year through September were down 7.6% compared to a year earlier.

September’s drop in overall exports was broad-based, with falling demand for American industrial materials as well as consumer and capital goods.

U.S.: Downward revisions to Q3 GDP?

The US goods and services trade deficit widened unexpectedly in September to US$41.8 bn, the worst tally in four months. The deterioration was due to rising imports and declining exports, the latter falling for a third month in a row in real terms. The results are worse than what the BEA had anticipated when it estimated Q3 GDP last week.

As today’s Hot Charts show, the agency estimated a less brutal deterioration in net exports of goods than what actually transpired. And with real exports of goods growing in Q3 at about a third of the pace estimated by the BEA, and real imports of goods growing faster in the quarter than what the agency had anticipated, it seems that trade may
have been a drag on the economy in Q3 rather than a contributor as depicted in last week’s GDP report.

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We now expect a three-tick downgrade to Q3 US GDP growth from 2.8% to 2.5% annualized. Unfortunately, the bad news doesn’t end there. September’s weak trade results are also bad for the current quarter. The higher imports probably mean that the Q3 stock build-up was larger than first thought, meaning that there’s perhaps a higher likelihood of
an inventory drawdown (and hence a moderation in production) in the current quarter. If that’s the case, Q4 US GDP growth could be running only at around 1% annualized. (NBF)

Consumer Borrowing Picks Up

Americans stepped up their borrowing in the third quarter, a trend that could boost the economy—but, in a worrying sign, the nation’s student-loan tab also rose.

Household debt outstanding, which includes mortgages, credit cards, auto loans and student loans, rose $127 billion between July and September to $11.28 trillion, the first increase since late last year and the biggest in more than five years, Federal Reserve Bank of New York figures showed Thursday.

Taking on Debt Again

Mortgage balances, the biggest part of household debt, increased by $56 billion amid fewer foreclosures, while Americans bumped up their auto-loan balances by $31 billion.

At the same time, the amount of education loans outstanding, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to surpass $1 trillion for the first time, according to this measure. The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as late payments on other debts dropped.

Yellen Defends Fed’s Role, Current Path

Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

The nominee said at the hearing that the decision about winding down the program depended on how the economy performs. “We have seen meaningful progress in the labor market,” Ms. Yellen said. “What the [Fed] is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

She also repeated the Fed’s message that even after the bond program ends, it will keep short-term interest rates near zero for a long time because the bank doesn’t want to remove its support too fast.

The Fed’s next meeting is Dec. 17-18.

Surprised smile  Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

imageThe Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending.

John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Euro Zone’s Rebound Feels Like Recession

(…) Gross domestic product in the 17-country euro zone grew only 0.1% last quarter, or 0.4% at an annualized rate, data published on Thursday showed. The rate of growth was down sharply from the second quarter, when policy makers and economists began to hope that the clouds were clearing for the troubled currency bloc. (…)

Even Germany’s economy grew only 0.3% last quarter, or 1.3% annualized, as weak demand in Europe and patchy global growth hit its exports. (…) France and Italy, the bloc’s next-biggest economies after Germany, both suffered small contractions.

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Industrial production down by 0.5% in euro area

IP in the Euro 17 area was down 0.5% MoM in September and for Q3 as a whole. IP of durable consumer goods were –2.6% MoM in September and –4.1% QoQ in Q3.

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EU Inflation Slows to Four-Year Low

The EU’s official statistics agency said Friday consumer prices rose 0.9% in the 12 months to October, a lower annual rate of inflation than the 1.3% recorded in September, and the lowest since October 2009.

Eurostat also confirmed that the annual rate of inflation in the 17 countries that share the euro was 0.7% in October, the lowest level since November 2009.

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Core inflation was +0.8% in October, down from 1.0% in September.

 

Brussels warns Spain and Italy on budgets

France’s ‘limited progress’ on reforms also under spotlight

Brussels has warned Spain and Italy that their budget plans for 2014 may not comply with the EU’s tough new debt and deficit rules, a move that could force both countries to revise their tax and spending programmes before resubmitting them to national parliaments.

The verdicts, the first time the European Commission has issued detailed evaluations of eurozone government budgets, also include a warning to France that its economic reform plan constitutes only “limited progress” towards reforming its slow-growing economy.

Earnings Season Ends

The third quarter earnings season came to an end today now that Wal-Mart (WMT) has released its numbers.  Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates.  Below is a chart comparing this quarter’s beat rate to past quarters since 2001.  Since the bull market began in March 2009, this is the second worst earnings beat rate we’ve seen.  Only Q1 of this year was worse. 

(…) the 8-quarter streak of more companies lowering guidance than raising guidance was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points.  When will companies finally offer up positive outlooks on the future?

China to Ease One-Child Policy

Xinhua said authorities will now allow couples to have two children if one of the parents is an only child. Currently, couples are restricted to one child except in some areas.

Morning MoneyBeat: Nasdaq Nears 4000

The Nasdaq Composite is poised to cross 4000 for the first time in 13 years, an event that is sure to prompt comparisons to the dot-com bubble. It shouldn’t.

(…) The Nasdaq is now dominated by mostly profitable companies. Names such as Pets.com have come and gone, replaced by more mature companies, plenty of which sit on loads of cash and pay hefty dividends. Apple Inc,, Microsoft Corp. and Cisco Systems Inc. are bigger and return much more cash to shareholders now than they did during the go-go days. The index also trades at a far cheaper multiple than it did 14 years ago.

Light bulb  Berkshire Reports New Stake in Exxon Mobil

Warren Buffett’s Berkshire Hathaway disclosed it had picked up a $3.45 billion stake in Exxon Mobil, a sizable new addition to its roughly $107 billion portfolio of stocks.

The stock was likely picked by Mr. Buffett himself, given the size of the investment.

 

NEW$ & VIEW$ (12 NOVEMBER 2013)

THE AMERICAN PROBLEM

Job Gap Widens in Uneven Recovery

America’s jobs recovery is proceeding on two separate tracks—a pattern that is persisting far longer than after past economic rebounds and lately has been growing worse.

(…) Youth unemployment, for example, nearly always improves after recessions more slowly than that of prime-age workers, those between 25 and 54. Following the 2001 recession, it took six months for the gap between the youth and prime-age unemployment rates to return to its long-run average. After the early 1990s recession, it took 30 months. This time, it has been 52 months, and the gap has hardly narrowed.

For those with decent jobs, wages are rising, albeit slowly, and job security is the strongest it has been since before the recession. Many families have paid down debts and are seeing the value of assets, from homes to stocks, rebound strongly.

But many others—the young, the less educated and particularly the unemployed—are experiencing hardly any recovery at all. Hiring remains weak, and the jobs that are available are disproportionately low-paying and often part-time. Wage growth is nearly nonexistent, in part because with so many people still looking for jobs, workers have little bargaining power.

Wage growth has moved on two tracks

The two-track nature of the recovery helps explain why the four-year-old upturn still doesn’t feel like one to many Americans. Higher earners are spending on cars, electronics and luxury items, boosting profits for the companies that make and sell such goods. But much of the rest of the economy remains stuck: Companies won’t hire or raise pay without more demand, and consumers can’t spend more without faster hiring and fatter paychecks. (…)

‘Rural America’ slow to recover
Net job growth near zero, say data

Employment growth in the US’s sparsely populated heartland has stagnated since the economy began to recover in 2010, according to official data that underscore the weakening economic power of rural America.

The data, from this year’s US Department of Agriculture’s Rural America at a Glance report, show that while employment in both urban and rural areas fell by 5 per cent during the 2007-09 recession and recovered by a similar level in 2010, their prospects have since diverged. Since the start of 2011, net job growth in non-metropolitan areas has been near zero, while it has averaged 1.4 per cent annually in metropolitan areas.

The report notes that rural job growth stagnation has coincided with the first-ever recorded net population decline in those regions, driven by a drop in the number of new migrants moving in. This means the unemployment rate in rural regions has not risen, since fewer people are seeking work.

Population loss has meant fewer jobs as demand for goods and services falls, which in turn encourages those with higher skills to move away. (…)

In summary (chart from Doug Short):

Click to View
 

Fingers crossed About 1-in-4 U.S. Pumps Selling Gas Below $3

Americans are seeing the lowest pump prices for gasoline since February 2011, AAA says.

Gas prices dropped 6.6 cent per gallon the past week to $3.186, which is down 25.3 cents from a year earlier.

That’s a 7.4% drop YoY! Right before Christmas. Chain store sales rose 1.2% last week, boosting the 4-week moving average to +2.1% YoY.

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Expiring US jobless benefits fuel concern
The scheme launched in 2008 is due to run out

(…) Unless Congress takes action to renew it again, about 1.3m long-term unemployed would see their benefits halted at the end of the year, and a further 850,000 would be denied access to the benefits in the first three months of next year, according to a report from the National Employment Law Project, an advocacy group. (…)

Federal assistance for the long-term unemployed was launched in 2008, during the last recession, and renewed until the end of this year. Michael Feroli, a senior economist at JPMorgan Chase, has estimated that the expiry of the federal jobless benefits would trim about 0.4 percentage points off annualised gross domestic product growth in the first quarter of next year. This is roughly equivalent to estimates of the hit to US output produced by last month’s US government shutdown. (…)

Sad smile  Small Businesses Optimism Takes a Tumble

Fall arrived literally this month, as small business optimism dropped from 93.9 to 91.6, largely due to a precipitous decline in hiring plans and expectations for future smal -business conditions. Of the ten Index components, seven turned negative, falling a total of 27 percentage points. The stalemate in early October over funding the government as well as the failed “launch” of the Obamacare website left 68% of owners feeling that the current period is a bad time to expand; 37% of those owners identified the political climate in Washington as the culprit—a record high level.

Small business optimism report data through October 2013

 

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Fingers crossed OECD: Global Growth to Pick Up

Economic growth is set to pick up in the euro zone, China and the U.K., while remaining sluggish in India, Brazil and Russia.

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Punch  LE PROBLÈME FRANÇAIS (from Reuters’ AlphaNow):

COTW_1111

Rating the Euro Zone’s Progress

Many euro-zone indicators have taken on a more promising outlook in recent months. Credit ratings firms are beginning to reflect that.

The direction of travel can be more important than where on the journey you are. That’s particularly true of the euro zone and the credit ratings assigned to its member states. November’s actions—a downgrade for France and improvements in outlooks for Spain and Portugal—send some key signals. The euro zone is undergoing adjustment, although not all its members are yet on the right track.

France’s downgrade to double-A by Standard & Poor’s might look like the most important action, but isn’t. French bond yields hardly reacted; strategists at Royal Bank of Scotland told investors to “ignore” the cut. That is quite right; France faces no immediate threat that should cause bond yields to spike higher.

Still, the rationale is cause for long-term worry: France is falling behind. “French exporters appear to continue to be losing market share to those European competitors whose governments have more effectively loosened the structural rigidities in their economies,” S&P warned. The European Commission last week forecast that net exports would contribute just 0.1 percentage point to French growth of 0.9% in 2014 and be a slight drag on growth in 2015. France’s government still hasn’t found the right policy direction to regain competitiveness.

More significant was Fitch’s decision to raise Spain’s rating outlook to stable from negative, the first of the major ratings firms to do so. Spain won plaudits for its fiscal and structural reforms, and the move to surplus in its current account. That is an important turnaround: Spain was on the front line of the crisis just 18 months ago.

Most interesting of all was Moody‘s move to a stable outlook from negative on Portugal. Moody’s is becoming rapidly less bearish on the euro zone. At the start of September, it had just two euro-zone sovereigns with a stable outlook; now there are six. The big move for Moody’s would be to shift Spain back to a stable outlook. The decision on Portugal provided a glint of hope, with Moody’s highlighting the benefit of a recovery in Spain, its key trading partner.

Ratings are often dismissed as backward-looking, and downgrades or upgrades are frequently priced in long before they actually happen. But outlooks can provide new information to the market. That is where investors should look for signposts.

IEA warns of future oil supply crunch
Concerns rise as Gulf states delay investment due to US shale revolution

(…) Mr Birol was speaking as the Paris-based IEA unveiled its annual outlook for the energy market. Its 2012 forecast that the US would be a net oil exporter by 2030 helped bring shale oil production to global attention. But this year the organisation downplayed the significance of US production growth, with Mr Birol calling shale “a surge, rather than revolution”.

The IEA still expects US oil output to reduce the world’s dependence on Middle Eastern oil in the near term: it now forecasts that the US will displace Saudi Arabia as the world’s biggest oil producer in 2015, two years earlier than it had estimated just 12 months ago.

But it expects US light tight oil production, which includes shale, to peak in 2020 and decline thereafter, even as global demand continues to grow to 101m barrels a day by 2035, from around 90m b/d today.

Outside the US, light tight oil production is only expected to contribute 1.5m b/d of supplies by 2035, as countries such as Russia and China make limited progress towards unlocking their shale reserves.

That will leave the market once more dependent on crude from the Opec oil cartel, of which Gulf producers are key members. (…)

But the IEA expects domestic demand in the Middle East to hit 10m b/d by 2035 – equal to China’s current consumption – thanks to subsidies for petrol and electricity, even as foreign demand for Gulf oil increases.

Mr Birol said the Gulf states needed to invest significantly now to meet rising demand after 2020, because projects take several years to begin producing. But he said he was concerned Gulf countries were misinterpreting the impact of rising US shale production. (…)

Gulf producers have taken a cautious approach to investment in recent years, in the face of fast growing US output. Saudi Arabia does not plan to increase its oil production capacity in the next 30 years, as new sources of supply, from US shale to Canadian oil sands, fill the demand gap.

The UAE is reported to have pushed back its target for raising production capacity to 3.5m b/d to 2020 from 2017, while Kuwait is struggling to overcome rapid decline rates from its existing fields. (…)

SENTIMENT WATCH

Charles Schwab’s Liz Ann Sonders posted this good Ned Davis chart, although her bullishness dictated her to write that sentiment was “a bit” stretched.

Sentiment does look a bit stretched in the short-term, with both the Ned Davis Crowd Sentiment Poll and SentimenTrader’s Smart Money/Dumb Money Confidence Poll showing elevated (extreme) levels of optimism. Investor sentiment shoots higher

Since 1995, being in such a “bit stretched” territory has not been profitable, on average:Screen Shot 2013-11-07 at 4.21.29 PM

This next chart, posted by ZeroHedge, is nothing to help sentiment get less stretched.

Note however that the latest tally from S&P reveals that estimates for Q3 have turned up to $27.02 ($26.77 last week) while the forecast for Q4 is now $28.23 ($28.38 last week).

 

NEW$ & VIEW$ (5 NOVEMBER 2013)

WEAK HALLOWEEN SALES

Weekly sales declined 0.6% last week, and the 4-week m.a. is down for the 12th consecutive week (+1.6% YoY).

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Nobody should be surprised as BloombergBriefs explains:

(…) the pace of per capita disposable personal income was 2 percent for the 12 months ended in August. This equates to a 1.8 percent increase in GAFO retail sales, which represents sales at stores that sell merchandise traditionally sold in department stores.

Credit conditions are similarly poor and indicative of a consumer reluctant to spend. During August, the pace of revolving credit (credit cards) contracted at an annualized 1.2 percent — the third consecutive monthly drop.

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TAPER WATCH

Three Fed Policy Voters Signal Prolonged Easing to Stoke Growth

“Monetary policy in the United States is likely to remain highly accommodative for some time,” Fed Governor Jerome Powell said yesterday in a speech in San Francisco. Boston Fed President Eric Rosengren backed further easing to “achieve full employment within a reasonable forecast horizon,” while James Bullard of the St. Louis Fed said in an interview on CNBC he wants the Fed to “meet our goals,” singling out inflation.

And now this: Fed’s Bullard: Need to see “tangible evidence” inflation moving back towards 2% before Taper
Is the Fed getting worried about deflation?

SAME SURVEY DATA, SEVERAL ACCOUNTS:

Domestic banks are making loans more readily available, easing lending policies to businesses as competition stiffens and relaxing standards on mortgages as demand for home loans cools, a Federal Reserve survey shows.

“Banks eased their lending policies for commercial and industrial loans” as well as standards on prime residential mortgage loans in the third quarter, the central bank said in its survey of senior loan officers released today in Washington. The share of banks relaxing mortgage standards was described as “modest.”

Banks reported “on net, weaker demand for prime and nontraditional mortgage loans” while demand for business loans “experienced little change,” according to the report. For other types of lending to consumers, banks “did not substantially change standards or terms.”

(…) Nearly 80% of banks said their credit standards for mortgages remained basically unchanged from July through September, according to a quarterly Fed survey of bank loan officers released Monday. Only about 15% of banks said their standards for mortgages have eased somewhat. (…)

More than 40% of banks said they saw a lower volume of mortgage applications since the spring, prior to the increase in mortgage rates. About a third of banks said demand was about the same or stronger.

(…) “Very few banks” reduced fees, lowered the minimum required down payments or accepted borrowers with lower credit scores, the report said. Several banks also reduced staff allocated to processing mortgage applications. (…)

Separately, very few banks said they have changed lending standards for approving credit cards or auto loans. Only about a quarter of banks saw stronger demand for auto loans since the spring.

But increased competition has driven some banks to loosen their commercial and industrial lending standards, the report said. Banks said they have experienced little change in demand for those loans.

  • Easing Loan Standards No Match for Higher Rates  (BMO)

More U.S. banks eased lending standards in Q3 but higher mortgage rates still resulted in weaker demand for residential mortgages. This could point a further slowing in home sales in the fourth quarter

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However,  banks are loosening standards for commercial real estate loans and demand is rising (charts via CalculatedRisk)

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EU Lowers Euro-Area Growth Outlook as Debt Crisis Lingers

Gross domestic product in the 17-nation currency bloc will rise by 1.1 percent in 2014, less than the 1.2 percent forecast in May, the Brussels-based European Commission said today. Unemployment, now at its highest rate since the euro was introduced, will be 12.2 percent in 2014, higher than the 12.1 percent predicted six months ago. (…)

Next year’s projected return to growth will come after the euro-area economy contracts an estimated 0.4 percent in 2013, the commission said in today’s report. That follows a decline in GDP of 0.7 percent in 2012, the first time output has fallen in two consecutive years since the introduction of Europe’s single currency in 1999.

Signs of a fragile recovery in 2014 disguise a north-south divide in the euro area, in which the economies of Germany, Belgium, Estonia and Ireland are predicted to gain momentum next year, while Spain, Greece, Italy and Portugal are projected to experience much weaker growth rates. The exceptions are Finland and the Netherlands, whose growth figures now lag behind their northern neighbors.

Italy’s finance minister warns on euro
ECB urged to ease monetary policy

Italy’s finance minister has warned of the risks of a strengthening euro to Europe’s fragile recovery, urging the European Central Bank to ease monetary policy to help the continent’s small and medium enterprises.

 

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Li Says China Needs 7.2% Expansion to Maintain Job Growth

Expansion at that pace would create 10 million jobs a year to maintain the urban registered jobless rate at about 4 percent, Li said in an Oct. 21 speech to the All-China Federation of Trade Unions published yesterday on its website. China’s growth has entered a stage of medium-to-high speed, meaning about 7.5 percent or above 7 percent, Li said.

Kellogg to Cut 7% of Workforce by 2017

Kellogg Co. said Monday that it will cut about 2,000 jobs, or 7% of its global workforce, over the next four years as part of a billion-dollar cost-cutting plan.

“We do see weaker top-line growth than we expected as some of our categories remain challenging,” Chief Executive John Bryant said in an interview, citing cereal in the U.S. as one of those segments.

 

NEW$ & VIEW$ (30 OCTOBER 2013)

U.S. Retail Sales Slip But Spending less Autos Firms

Retail sales and food services posted a 0.1% slip (+3.2% y/y) during September following an unrevised 0.2% August rise. A 2.2% decline (+5.1% y/y) in motor vehicle purchases held back total sales for the month. It was consistent with the earlier reported fall in unit vehicle sales. Retail sales excluding autos rose 0.4% (2.8% y/y) after a 0.1% August uptick. A 0.3% rise had been expected.

Sales at general merchandise stores gained 0.4% (0.6% y/y) after a 0.2% August decline. Sales at furniture and electronics stores also rose 0.4% (3.0% y/y) on the heels of a 0.6% rise. Sales of nonstore retailers gained 0.4% (8.9% y/y) following a 0.3% August increase. Sales of building materials and garden equipment ticked up 0.1% (5.8% y/y) following their 0.3% shortfall. Countering these gains was a 0.5% decline (+2.7% y/y) in apparel store sales after a 0.2% August drop.

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Morgan Stanley economist Ted Wieseman said that post-shutdown auto-sales numbers still look weak and traffic at shopping malls remained slow into the second half of the month. “We’re not off to a strong start in the fourth quarter,” Mr. Wieseman said. (WSJ)

HALLOWEEEN SPENDING (Bus. Week)

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Home Prices Rose in August, but Pace of Gains Is Slowing

U.S. home prices continued to advance in August but increases are decelerating, according to the S&P/Case-Shiller home-price report released Tuesday.

Home prices in August were up 12.8% from the year-earlier period, the fastest pace since early 2006, according to the Standard & Poor’s/Case-Shiller home-price index. Of the 20 cities in the main index, 13 posted double-digit annual gains.

However, monthly details of the Case-Shiller report show some softening. Home prices rose 1.3% in August, the smallest monthly gain since March, as 16 of the 20 cities saw slower growth. After seasonal adjustments, home prices in August rose 0.9%, below a recent peak of 1.9% in March.

Land Prices Hit the Brakes

The slowdown in sales of newly built homes since last summer has sapped momentum from the land market, as home builders are starting to balk at paying increasingly lofty prices for lots.

Nationally, lot prices have gone from a gain of nearly 7% in the first quarter of 2013 compared with the previous quarter, to gains of about 6% in the second quarter and 4% in the third quarter, according to a survey of land buyers and sellers in 55 U.S. markets conducted by housing-research and advisory firm Zelman & Associates. (…)

The land-price increases went hand-in-hand with the rising prices of new homes. The average price of a new home in the U.S. reached an all-time high of $337,000 in April, census data show. During the housing crisis, the average dipped as low as $245,000 in January 2009.

Wholesale Prices Tame as Fed Meets

The producer-price index, which measures how much companies pay for everything from footwear to computers, fell 0.1% in September from August, the Labor Department said Tuesday. The decline was primarily the result of an 18% decline in fresh-vegetable prices.

Excluding food and energy components, core wholesale prices rose 0.1%. Compared to the same period last year, September wholesale prices rose by 0.3%, the lowest annual level since October 2009.

German Unemployment Rises a Third Month as Growth Slows

The number of people out of work climbed a seasonally-adjusted 2,000 to 2.97 million, after gaining by a revised 24,000 in September, the Nuremberg-based Federal Labor Agency said today. Economists predicted no change, according to the median of 36 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.9 percent.

Unemployment in East Germany rose by 2,000, leaving the jobless rate unchanged at 10.3 percent. The number of people out of work in West Germany was unchanged and the rate stayed at 6.1 percent. The national rate of 6.9 percent is near the lowest level in two decades.

Euro-Zone Banks Tighten Lending Standards

Euro zone commercial banks tightened their standards on new loans to private-sector firms during the third quarter, the European Central Bank said Wednesday, suggesting the region’s recovery remains hampered by a lack of funds to finance new spending, investment and hiring. (…)

The net percentage of banks reporting higher lending standards to nonfinancial businesses stood at 5% in the third quarter, the ECB said, compared with 7% in the second quarter. The figures are calculated by subtracting the percentage of banks reporting looser standards on new loans from those saying that they have made it tougher for companies and households to obtain them.

The findings “confirmed the ongoing stabilization in credit conditions for firms and households in the context of still weak loan demand,” the ECB said.

The sluggish economy continued to weigh on business demand for new credit, according to the report. Demand for housing loans and consumer credit rose slightly in the third quarter from the second, the ECB said.

Banks in the region expect loan demand to pick up across all categories in the fourth quarter.

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Troubled loans double at Europe’s banks
Non-performing loans approach €1.2tn as review of assets looms

A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. (…)

He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012. (…)

PwC’s figures, which are derived from lenders’ accounts, showed that Germany, the EU’s biggest economy, had the highest amount of non-performing loans at the end of 2012, at €179bn, unchanged on the previous year’s number.

Spain had €167bn of NPLs, up sharply from the €136bn recorded for 2011. Britain’s €164bn of non-performing loans represented a decline from €172bn in 2011. (…)

EARNINGS WATCH

296 companies representing 66.0% of S&P 500’s market-cap have reported so far. Surprise is at 64% on earnings (63% last week) and 31% on revenues (30%). RBC Capital’s blended earnings growth for Q3 is now +4.9% (4.6% last week).