NEW$ & VIEW$ (31 DECEMBER 2012)


US budget talks falter as clock ticks down  Parties blame each other for failing to reach fiscal cliff deal

“The government is not working,” said Steve Bell, senior director of the Bipartisan Policy Center, who was a senior budget adviser to Senate Republicans for many years. “There is no doubt that the policy-making apparatus in this town has collapsed.” (WSJ)

U.S. Consumer Spending Surges During Pre-Christmas Weekend

Americans’ self-reported daily spending surged to $119 during the pre-Christmas weekend spanning Dec. 21-23, easily the highest three-day average for the holiday season and for the year. This is also the best pre-Christmas showing since Gallup began daily tracking of consumer spending in 2008.


The eleventh-hour surge may help boost retail sales figures that had been largely viewed as disappointing to date this holiday season. Indeed, the $119 daily average for the 2012 pre-Christmas weekend was easily the highest of December; the previous high was $100 for the days spanning Dec. 19-22. Prior to that, the previous highs for both the holiday season and the year were $103 for Nov. 25-27 and $102 for Nov. 27-29 — the days following Thanksgiving, during which Black Friday and Cyber Monday sales lured bargain-hungry shoppers.

More broadly, the surge in Americans’ spending during the pre-Christmas weekend marks a return to spending levels not seen since 2008, when Americans regularly reported daily spending well into the triple digits.


New-Home Sales Rise to Highest Level in Two Years  New-home sales hit their highest level in more than two years in November, the latest in a string of positive reports showing a steady housing recovery.

New single-family home sales increased by 4.4% last month from October to a seasonally adjusted annual rate of 377,000, which is the highest level since April 2010, the Commerce Department said Thursday. Sales were up 15.3% from November 2011.

The number of new homes listed for sale, adjusted for seasonal factors, at the end of November was 149,000, a supply that would take 4.7 months to deplete at the current sales pace. The median price for a new home in November was $246,200, up 3.7% from a month prior.

Don’t get too impressed by the “highest level in two years”. Still scraping the basement floor as this CalculatedRisk chart shows:image

New home construction will be rising for several years as household formation rises and affordability remains high.

The NAR calculates that mortgage payments on the typical resale home consumed less than 13% of median family income in October. That’s near the lowest levels in at least three decades and almost half the peak prior to the 2006 bust. Still, first-time buyers continue to punch well below their weight, capturing a 30% share of transactions versus a normal 40%
or more. With household formations on the rise, imagine the upswing in sales when job growth improves and mortgage lending standards ease. (BMO Capital)


People wishing to buy a house now are faced with precious little visible inventory of new houses (chart from CalculatedRisk)…image

…and of existing houses:

Pending Home Sales Climb

[image]The National Association of Realtors said Friday the index of pending home sales, reflecting sales that have gone into contract but haven’t yet closed, rose 9.8% last month from one year ago and by 1.7% from October. (…)

In the past five years, the Realtors’ index has been higher only in two other months, both during periods in which a home-buyer tax credit stoked a flurry of sales. The index has returned to levels that prevailed in 2002, before the housing bubble began in earnest. (…)

What got less media attention is this:

Total housing inventory at the end of November fell 3.8 percent to 2.03 million existing homes available for sale, which represents a 4.8-month supply at the current sales pace; it was 5.3 months in October, and is the lowest housing supply since September of 2005 when it was 4.6 months.

Listed inventory is 22.5 percent below a year ago when there was a 7.1-month supply. Raw unsold inventory is now at the lowest level since December 2001 when there were 1.89 million homes on the market. (NAR)

From BMO Capital:

Median U.S. existing home prices have sprinted up 10.1% in the past year, the fastest increase since the start of 2006 (i.e. seven long years ago). And the run-up is no fluke. With the supply of unsold homes dropping to its lowest level (4.8 months) since late 2005, there is still plenty of room to run for prices. A balanced market is generally seen as about 6 months, so the U.S. suddenly finds itself very much in sellers’ market terrain. It’s a whole new world.


Rising demand, lower inventory = rising prices = rising demand = rising inventory = higher sales …eventually higher construction activity = …



…higher employment:

Construction Jobs Set to Build

Despite rising home prices and more home construction, one crucial piece of the real-estate equation—construction jobs—continues to lag behind. But that could change soon.

Building permits for single-family homes, a barometer of future construction activity, jumped to an annual rate of 566,000 in October from 452,000 in January, according to Moody’s Analytics. And construction workers already on the job are putting in longer hours. The average workweek for production and nonsupervisory construction workers was 39.4 hours in November and October, the highest level since December 2006. The data hint that companies will need to hire soon.

Tenants Feel Pinch of Rising Rents

Record-low mortgage rates mean that homeowners have a smaller financial burden for their residences than at any time since the early 1980s. But rising rents are squeezing many families and leaving them with less to spend.

Across the U.S., “effective” monthly rent—which means the final amount paid including discounts—averaged $1,044 in October, up 3.7% from a year ago, according to Reis Inc., a real-estate data firm. Landlords no longer have to “pony up in order to entice tenants,” said Victor Calanog, Reis’s chief economist. He added that rising vacancies suggest rents are “approaching equilibrium,” but aren’t likely to fall soon.

In the third quarter, the ratio of rent to after-tax mortgage payments was 107.8%, according to Deutsche Bank. A rent-to-mortgage ratio above 100 means mortgage payments are cheaper than rent for the median homeowner. The ratio was down from an all-time high of 120.7% in the first quarter, but well above an average of 85% since 1991.

The rising cost of renting is putting pressure on tenants at a time when many are still grappling with slow or falling income growth. In the third quarter, renters spent 24.12% of their disposable income on financial obligations—things such as rent, debts and auto leases. That was the highest level since early 2010, according to the Federal Reserve.

This contrasts with living costs for homeowners, which have fallen steadily in recent years amid record low interest rates. During the third quarter, homeowners, including those who don’t have mortgages, spent 13.9% of their disposable income on financial obligations, the lowest share since 1984, according to the Federal Reserve.

Yes, the shadow inventory remains, but here’s how its impact is constrained and delayed:

Las Vegas Housing Update: Existing Sales Remain Constrained by Tight Inventory

Las Vegas existing single-family sales fell 15% y/y in November, an accelerating decline relative to the 4% y/y decrease in October. Notably, this marks the sixth consecutive month sales have declined y/y following 16 months of positive sales comparisons. Overall, we believe the recent sales slowdown is reflecting the increasingly constrained inventory situation in Las Vegas, driven by an unusually slow replenishment rate of distressed homes [foreclosures, real estate owned (REO), and short sales] to the market.

Pointing up Last October, Nevada passed a state law (AB 284) requiring lenders to include notarized affidavits proving loan ownership before foreclosure, with failure to comply including felony charges. Not surprisingly, the rate of foreclosure processing in Nevada has stalled dramatically. As a reminder, in addition to AB 284, last year the Las Vegas City Council also passed an ordinance requiring banks to maintain vacant foreclosed properties and increased fees once a notice of default has been filed. Not surprisingly this lead to a sharp drop-off in notice of default filings and foreclosures.

Las Vegas new home sales rose 55% y/y in October according to Dataquick, and several public homebuilders have highlighted strength in the Las Vegas market. Overall, there still remains a significant overhang of vacant/distressed homes across the Las Vegas market (in excess of 30,000 units by our math), which we expect will persist for several years. However, at least near term, we think the recent price and inventory trends are encouraging, indicating that Vegas remains on its long road to recovery.

Total listings fell 23% y/y to 19,299 units, marking the 17th consecutive y/y decline. The non-seasonally adjusted months’ supply of condos and single-family homes for sale currently stands at 5.9 months, down from 6.5 months last year. Of the total units listed for sale, a whopping 74% had pending but unaccepted contract offers (primarily short sales), up from 53% a year ago. Meanwhile, the total number of units listed without offers has decreased 57% from year-ago levels, leaving just a 1.5-month supply of inventory without an existing offer. (Raymond James)


Euro Zone Set to Contract Again

The Centre for Economic Policy Research and the Bank of Italy said on Friday their Eurocoin indicator improved to -0.27% in December from -0.29% in November. (…)

The euro-zone economy shrank for six straight months to the end of September and the negative Eurocoin reading suggests it will shrink again in the final quarter of the year, even if the pace of decline appears to have slowed a little in December. CEPR and the Bank of Italy said the small improvement this month reflected an easing of tensions in financial markets, as well as business surveys that were less negative than in previous months.

Portugal braced for ‘fiscal earthquake’
Income tax to rise more than a third on New Year’s day

Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. (…)

(…) in Portugal, where the average monthly wage is about €800, taxpayers described as “high earners” tend to be middle-class professionals rather than business tycoons.

A couple in which each partner earns about €3,500 a month – two senior university professors, for example – could now find themselves in the top tax bracket, when previously they would have had to earn more than €6,000 a month each to pay the top rate.

The highest income tax rate is be increased in January from 46.5 to 48 per cent and will apply to couples earning more than €80,000 a year, compared with €153,000 previously (income tax in Portugal is levied on family units). They will also pay an additional 2.5 per cent “solidarity tax” on their income. (…)

Egyptian pound sinks to record low  Devaluation fears prompt Egyptians to buy dollars


Q4 guidance update from Factset:

For Q4 2012, 80 companies have issued negative EPS guidance while 30 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for
Q4 2012 stands at 73% (80 out of 110). If this is the final percentage for the quarter, the Q4 2012 quarter will tie the Q4 2011 (73%) as the quarter with the second-highest percentage of companies issuing negative EPS guidance since FactSet began tracking guidance data in Q1 2006. The Q3 2012 quarter has the record for the quarter with the highest percentage of negative EPS guidance (74%).

At the sector level (with a minimum of five companies issuing quarterly EPS guidance), the Information Technology has the highest percentage (91%) of companies issuing negative EPS guidance for the quarter. Over the past five years, the average percentage of companies in the Information Technology sector issuing negative EPS guidance is 56%. If 91% is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter in this sector since FactSet began tracking guidance data in Q1 2006. The current record of 76% for the Information Technology sector occurred in three quarters: Q3 2012, Q1 2009, and Q1 2007.

Of the 32 companies in the Information Technology sector that have issued EPS guidance, 29 have issued negative EPS guidance and only 3 companies have issued positive EPS guidance. (…) Not only are more companies in the Information Technology sector issuing negative EPS guidance, but these same companies are also issuing guidance below EPS estimates by the widest margins of any sector. On average companies in the Information Technology sector have issued EPS guidance that was
14.4% below the mean estimate.

For the S&P 500 on average, companies have issued EPS guidance that was 6.5% below the mean EPS estimate. This percentage is actually
slightly better than the trailing 5-year average for the index of -7.7%.

Excluding IT, 51 (65%) of S&P 500 companies issued negative guidance for Q4 and 27 issued positive guidance.


Analyst estimates are revised downward:

Since the start of the fourth quarter, analysts have reduced earnings estimates for companies in the S&P 500. During this time frame, the bottom-up EPS estimate for the fourth quarter has dropped 6.2% (to
$25.23 from $26.89), while the price of the index has dropped 1.6% (to 1418.10 from 1440.67).


But that would still leave earnings up from Q3’s $24.38 and +6.3% Y/Y.


The S&P 500 Index has declined 3.8% from its Dec. 18 1455 level and is now sitting on  its 200 day m.a. (1392). John P. Hussman (Aspirin for a Broken Femur) explains the importance of that level:

(…) it’s worth noting that since 1940, the S&P 500 has achieved an average annual total return of 14.5% in weeks where it was above its 200-day moving average as of the prior week’s close, and just 4.4% when it was below its 200-day moving average (only slightly more than the 4.2% average Treasury bill yield during that time, and with deep drawdowns usually concentrated in this partition).


By contrast, since 2009, the S&P 500 has achieved an average total return of just 5.4% annually when it has been above its 200-day average, versus 36.7% when it has been below. Put another way, advancing trends above the 200-day average have repeatedly failed, making limited net progress overall, but declines have been halted and often breathtakingly reversed with each intervention. This pattern also reflects an unfinished cycle, the completion of which is likely to significantly damage the appeal of reflexively “buying the dip.”

I would have liked Hussman to do the same exercise but segregating the results when the moving average is trending up or down. Currently, the 200 day m.a. is trending up (same with 100 day m.a.), providing for a more solid base.

Winking smile  TIME TO EXERCISE!




Fed Sets Stage for Stimulus

Bernanke sought to shoot down criticism of the Fed’s easy-money policies and strengthen the case for new efforts by the central bank to bring down what he described as gravely high unemployment.

“Central bank securities purchases have provided meaningful support to the economic recovery,” he said adding later that, “we should not rule out the further use of such policies if economic conditions warrant.” (…)

Meaningful? Perhaps, but certainly not significant.


Punch  “Why is it that we’ve had such incredibly accommodative monetary policy for so long and we’ve had so little growth?” Donald Kohn, a Brookings Institution scholar, asked from the audience after a panel discussion here Saturday.

It was a striking question because Mr. Kohn is a former vice chairman of the Fed and was Mr. Bernanke’s right-hand man during the financial crisis. The headwinds that the Fed often cites—Europe, household debt-reduction, the housing bust—he said were unsatisfying answers. “There is a lot we don’t understand,” he said.

“We’re in a world where monetary policy has much less traction,” Charles Bean, deputy governor of the Bank of England, said from the audience. (WSJ)

Martin Feldstein:

“The Fed is at a point where another round of quantitative easing would be a mistake,” said Martin Feldstein, a Harvard University professor and former economic adviser to President Ronald Reagan.

The benefits of bond buying would be small, Mr. Feldstein said at Jackson Hole. He added that the impediments to bringing down unemployment are immense and potentially beyond the Fed’s tools.

Bernanke seeks to boost equities but he is realistic:

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Really not much of a Bernanke put here, is there? Ben is no Italian to proclaim “believe me, it will be enough!”

Mohamed El-Erian in todays’ FT:

Here, fundamentals – whether domestic or international – can overwhelm the impact of Fed action. This is especially true in today’s global economy; one that is in a synchronised slowdown, gripped by an unusual level of political polarisation in Europe and the US and lacking any sustained cross-border policy coordination.

Pointing up  Recent growth in the U.S. GDP came from stronger exports when just about the whole world is in a big slowdown. Here’s what’s happening in Canada, the U.S. biggest trade partner:

Export Slump Stalls Canada Growth in Second Quarter

Exports grew at a 0.8 percent pace, the slowest in a year, even as imports accelerated to the fastest growth rate since the second quarter of 2011. Net exports have acted as a drag on growth for two consecutive quarters.

Importantly, inventories are accumulating:

(…) Businesses also added an annualized C$7.01 billion ($7.08 billion) in inventories during the quarter, meaning stockpiles added 1.7 percentage points to growth in the period, the largest single contribution. (…)

And, as NBF warns:

Real GDI is a measure that combines the change in production (such as GDP) with the change of purchasing power of that production on world markets (terms of trade). As today’s Hot Chart shows, real GDI in Canada actually contracted 1.6% in Q2, the first decline since the 2008-2009 recession.


First Europe, then China, Brazil, Japan and now Canada. What’s left for U.S. exports? Neverland?

Housing is recovering, but only slowly and from such a low base that its impact on the economy is pretty small.

Can the consumer save the day, again? The 0.8% MoM jump in July real retail sales cheered investors. The reality is that July merely offset the 0.8% drop in June. Since February, real retail sales have declined 0.2%.

Only 2 things can boost consumer spending during the rest of the year:

  1. A sharp acceleration in employment growth. If monthly gains match the first 7 months average of 151k, employment growth will remain below 1.5% YoY for the rest of 2012, keeping nominal disposable income growth below 3.0%.
  2. A meaningful decline in oil prices which would decrease the PCE deflator below 2.0%.

It is important to understand how lower oil prices helped the U.S. consumer and the economy in recent months.


Oil prices peaked in early May and dropped 25% during the following 2 months, triggering a 13% decline in gasoline prices. Overall inflation thus declined from the +3.0% range (YoY) early in the year to 1.4% in July even though core inflation remained in the 2.2% range.


However, oil prices have since bounced back 20% to $95 (WTI), lifting U.S. gasoline prices to 3.80/gl. on average, up 13% from their late June levels and up 18% from their December 2011 level. The August and September CPI data will reflect this surge which, if oil prices remain at current levels, will extend and even accelerate through December. The recent short-lived oil dividend has morphed into a significant oil tax, right on time for the important September-December period.

The SPR release scenario must be on Obama’s mind.

Here’s my math on the consumer assuming 150k monthly employment growth and relatively stable oil prices from current levels. It calls for real spending growth below 1.0% for the rest of 2012, half of what we got in the last 3 months.



Very few people talk about a U.S. recession these days. The ECRI still has a recession call on its website but Doug Short argues that their arguments are fading away rapidly:

A cornerstone of Lakshman Achuthan’s argument is that four key indicators used by the NBER to make official recession calls are, as he put it, “rolling over.” Here are the four indicators in question. Only one, real retail sales (which is the most volatile of the lot) had been showing intermittent signs of contraction but subsequently improved in the July data. There is no question that the recovery from the Great Recession has been frustratingly slow, but the overall trend has been one of improvement. The next of the Big Four, and the first for August data, will be next Friday’s employment report.

Of course, the recent months for these data series are subject to revision. But at this point, economic data have consistently contradicted Achuthan’s “rolling over” assertion and claim that we’re now in a recession, a position that is rapidly becoming an embarrassment.

Not rolling over, but quite fragile in my opinion, especially since real income, employment and real sales are all tightly intertwined.


Lego Chief Sees Weak U.S. Demand for Toys

Lego Chief Executive Jørgen Vig Knudstorp signaled deep concern about the U.S. toy market on Friday even after the iconic Danish toy maker reported a solid first-half performance.

Mr. Knudstorp, a 10-year veteran of the toy industry, said clouds have already formed over the U.S. toy market: “These six months have been the most negative toy market that I have seen in the U.S…so that worries us.”



imageThe Spanish manufacturing sector remained in contraction in August as output, new orders and employment all continued to decrease. The seasonally adjusted Markit Purchasing Managers’ Index® (PMI®) – a composite indicator designed to measure the performance of the manufacturing economy – remained well below the 50.0 no-change mark, posting 44.0.

A further decline in new orders was seen at Spanish manufacturing firms. The pace of reduction remained marked despite easing to its slowest since February. New export orders fell less quickly than total new business, with the latest decline the slowest since August 2011.

A further sharp decline in employment was recorded in August, with the rate of job cuts slowing only marginally from July.

Spanish Unemployment to Swell as Public Jobs Vanish

(…) Television stations, airports, hospitals, schools, fire brigades and social services from Spain’s southernmost tip to the Balearic islands in the east are reducing headcount as Rajoy tasks regions and municipalities with shouldering 60 percent of the cuts needed to reduce the budget shortfall to 2.8 percent of gross domestic product in the next two years.(…)

State employment has doubled in 30 years in Spain compared with a 50 percent increase in the private sector, according to a report published in December by the business lobby CEOE. By shedding 200,000 jobs, local governments would be eliminating positions created between 2009 and mid-2010 to counter the recession, AFI’s Balina said.

“It’s obvious the world of public employees in Spain needs to become smaller and that’ll create unemployment, it can’t be helped,” said Javier Diaz-Gimenez, a professor of economics at IESE business school in Madrid. (…)

[image]Premier Rajoy continues his poker game with Draghi but he’s got no chips looking at him. Capital outflows are accelerating and Spanish banks, losing deposits daily, can no longer buy Spanish sovereigns.

The clock is ticking for Spain. The country will need to cover a large share of its remaining refinancing needs for the year in October, when more than 20 billion euros in debt comes due.

ECB chief and Spanish PM on collision course Draghi’s largesse will now come with more strings attached

(…) But what will Mr Rajoy do after Mr Draghi makes his move this week? He has insisted any EU aid programme of the kind Mr Draghi is expected to require must come with “conditions light” – meaning few requirements beyond his existing reforms.

Given the politically poisonous symbolism that troika” missions have acquired in Ireland and Greece, Mr Rajoy may be correct in worrying what a similar mission to Madrid might bring.

But given bailout backlash in northern Europe, no new aid is likely to come without such missions. By turning them into a political talisman, he may be backing his government into a corner. How Mr Rajoy extricates himself could well set the stage for the next, difficult phase of the crisis.

High five  Schaeuble’s Warning

German Finance Minister Wolfgang Schaeuble warned today against expecting too much of the ECB, saying whatever Draghi announces must fall within the central bank’s mandate. “We have to be very careful that we don’t raise false expectations,” Schaeuble told Deutschlandfunk radio.

ECB’s Draghi Hints at Bond Purchases

The ECB’s Draghi dropped more hints about how the central bank could support struggling countries, suggesting it was free to buy government bonds maturing in three years or less.

(…)Mr. Draghi indicated on Monday that the ECB would be open to buying bonds with a maturity of two to three years, stressing that such purchases wouldn’t break European Union treaties, according to several lawmakers present at the hearing. (…)

Mr. Draghi added that purchases of longer-dated debt would constitute monetary financing of governments and thus break EU treaties, a person present at the meeting said. (…)

High five  (…) While the ECB president’s comments may remove lingering doubts about the bank’s willingness to intervene in bond markets, several European officials familiar with discussions among euro-zone governments said in recent days that Spain may not request financial support for several months—a step Mr. Draghi has indicated is necessary for the ECB to step in.

A hint from within:
Andalucia seeks bailout from Madrid
Move underlines liquidity crunch facing Spanish regions

Just kidding  Moody’s Goes Negative on EU Outlook

Moody’s Investors Service has put the European Union’s triple-A credit rating on a negative outlook in a move that reflects actions the ratings firm has taken on some of the euro-zone’s largest members.

Moody’s Investors Service has put the European Union’s triple-A credit rating on a negative outlook in a move that reflects actions the ratings firm has taken on some of the euro-zone’s largest members, including Germany and the Netherlands.

“Moody’s believes that it is reasonable to assume that the EU’s credit-worthiness should move in line with the credit-worthiness of its strongest key member states considering the significant linkages between member states and the EU,” Moody’s said in a release.

Around 45% of the EU’s annual budget is drawn from contributions made by triple-A rated Germany, France, the U.K. and the Netherlands. In July Moody’s put both Germany and the Netherlands on a negative outlook.

Meanwhile, in the real world:


imageEurozone retailers faced a deepening downturn in sales in August, according to PMI® data from Markit. Sales fell on a month-on-month basis for the tenth successive month – the second-longest sequence in the survey history – and at a faster rate than in July.

The Eurozone Retail PMI declined from 46.4 in July to 44.4 in August, the lowest since May and indicative of a sharp fall in sales. Only once has the PMI remained below 50.0 for a longer period (from June 2008 to September 2009).

Eurozone retail PMI figures are based on responses from the three largest euro area economies. August data signalled worsening trends in all three countries, with no change in German retail sales accompanied by steeper rates of decline in both France and Italy. August was only the second month in the past 23 where German retailers had not registered sales growth. The pace of contraction in Italy was the fastest in three months, but short of the survey record posted in January. The sequence of falling sales in France was extended to five months, the longest registered in three years.

Sad smile  Europe Struggles With Inflation

Factories in the euro zone raised their prices in July as energy costs swelled, pointing to further upward pressure on consumer prices in the currency bloc later this year.

Producer prices in the 17 nations that use the euro rose 0.4% in July from June and were 1.8% higher than a year before, the European Union’s statistics agency Eurostat said Tuesday.

Storm cloud  Swiss Growth Outlook Is at Risk After Unexpected Decline in GDP: Economy  Swiss government officials and economic forecasters may cut their predictions for growth this year after gross domestic product unexpectedly fell in the second quarter.

SNB’s Jordan Repeats Franc Pledge, Sees Property Threat

“In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy, and would carry with it the risk of deflationary developments,” Jordan said at a conference in Zurich today. “With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination.”


Storm cloud  China Manufacturing Unexpectedly Contracts as Orders Drop

China’s official manufacturing Purchasing Managers Index fell to a nine-month low of 49.2 in August, the China Federation of Logistics and Purchasing, which issues the data with the National Bureau of Statistics, said Saturday.

This is the first time since November the gauge has been below 50, indicating a contraction in nationwide manufacturing activity.

A gauge of export orders was unchanged from the previous month at 46.6, marking the third straight contraction. The decline in the new orders index deepened to 48.7 and a measure of output fell to 50.9. All three readings were the lowest since November. (…)

Pointing up  The employment gauge in today’s survey was below 50 for a third month and at the lowest level since January (…).

Storm cloud  South Korea Exports Fall for Second Month on Europe, Won

Overseas shipments fell 6.2 percent in August from a year earlier, after an 8.8 percent decline in July, the Ministry of Knowledge Economy said in a statement today. Industrial output fell 1.6 percent in July from the previous month, Statistics Korea said yesterday, the second monthly drop.

Fingers crossed  South Korea Readies New Stimulus Package

South Korean Finance Minister Bahk Jae-wan said the government was preparing a new stimulus package to support Asia’s fourth-largest economy.

Storm cloud  Japan Manufacturing PMI dips to 16-month low in August

August data from Markit/JMMA signalled a further decline in manufacturing output, as new business decreased at an accelerated rate. Backlogs of work fell as a result, while jobs growth eased to near-stagnation.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) posted 47.7 in August, down from 47.9 one month previously, signalling the sharpest worsening of Japanese manufacturing sector operating conditions since April 2011. Moreover, the latest deterioration in business conditions was broad-based across all three market groups.

The rate of decline in new work was marked, and broadly unmoved since the month before. New export business fell at a similarly sharp rate, albeit one slower than in July. Anecdotal evidence provided by survey respondents suggested that falling new orders reflected weak demand on global markets, with China and Europe mentioned in particular.

Storm cloud  Vietnam Manufacturing Slows

Manufacturing activity in Vietnam continued to contract in August, but at the slowest rate in four months, according to HSBC’s purchasing managers index.

Pointing up  CEBM Research had warned us in mid-August that August was not showing any improvement. Here’s their late August assessment which offers little hope for a better September:

Similar to the results from the previous month’s CEBM Survey, industrial enterprises surveyed by CEBM reported below-expectations August activity. The seasonal recovery which is usually observed in late August was NOT seen.

Infrastructure projects have been progressing slowly and a number of projects were suspended due to lack of funding. Steel demand continues to slide in 2H of August. All respondents in the steel sector reported below-expectations sales. Weak demand also led to rising inventory levels among steelmakers. Machinery demand remains weak and inventory continues to pile up. In terms of downstream sectors, auto sales recovered and were above respondents’ expectations. Property sales declined slightly in August in-line with seasonality, but both developers and agents were hopeful for a strong showing in September.

In the same vein, ISI’s China sales weekly survey just keeps falling.

And so is China’s credibility:

We (ISI) are still using 7.0% y/y real GDP in our 3Q12 forecast because we still believe that is about the number that Beijing will announce.  China’s GDP data are opaque at best.  But when we go thru the exercise of trying to add up the pieces that get to 7% we fall a couple of percentage points short.  Bluntly, a 7.0% y/y real GDP growth number announced for 3Q12 will severely strain Beijing’s credibility among essentially independent outside observers.


 China manufacturers face fall in demand  Wage inflation prompts retailers to move orders to south-east Asia

(…) Labour-intensive industries across Dongguan, a city of 8m that from a distance resembles a forest of factories, are grappling with a drop in orders from the west at a time when double-digit Chinese wage inflation over the past couple of years has prompted western retailers to move orders to south-east Asia and Bangladesh.

The weakness in consumer demand in Europe and the US has prompted retailers to delay orders and extend payment terms from 60 days to 90 days, putting more pressure on manufacturers in the city. Bernie Ting, chairman of the Hong Kong Toys Council and director of a childcare products and toy company, says: “It’s a complicated year, similar in scope to 2008. In a normal year, we would have one or two factors affecting us. This year, it’s five-10 factors.” (…)

The Party is looking for action:

Not so easy in Japan:

Given all of the above why is this?

It has been a heady summer rally. America’s S&P 500 index is up 10pc since early June. France’s CAC has risen 16pc, and Germany’s DAX 15pc, though both countries are flirting with double-dip recessions.

Italy is up 20pc and Spain up 24pc since mid-July in the face of full-blown depression.

And that?

Volatility to increase?

Technicals flash amber as ECB and Fed struggle to validate rhetoric

Louise Yamada clinched her reputation as America’s oracle of technical analysis with an emphatic sell warning at the top of the Wall Street boom in 2007. (…)

“A lot of this rally is just short-covering by hedge funds. There is underlying weakness creeping into the markets. Volume is low, and going down. You could call it a vacuum rally. New highs against new lows have been deteriorating.”

The US index of transport stocks have lagged the Dow Jones industrials, a time-honoured warning sign. “There is no question that we have a Dow Theory sell signal in place. This is rare and needs to be watched carefully. It tends to be accurate, eventually,” she said. (…)

Both the VIX volatility index and the “put/call” ratio on the options market are signalling the sort of complacency levels seen at past peaks. (…)

Looming over all else is the ruling of the German Constitutional Court on the legality of the ESM on September 12. Elga Bartsch from Morgan Stanley said there is a 40pc chance that the court will “ban” the fund. “Markets are not priced appropriately for the downside tail risk of a possible ‘no’ verdict,” she said with marvellous understatement.

By the way:



With the final few companies reporting earnings for Q2 2012 next week, it marks a good time to analyze EPS guidance data for the third quarter. To date, 101 companies in the S&P 500 have issued quarterly EPS guidance for the third quarter. Of these 101 companies, 80 have issued negative EPS guidance and 21 have issued positive EPS guidance.

Compared to Q2 2012, these numbers are more negative. For Q2 2012, 107 companies issued EPS guidance. Of these 107 companies, 72 issued negative EPS guidance and 35 issued positive EPS guidance.

Compared to the trailing five-year average, the guidance numbers for Q3 2012 are also more negative. On average over the past five years, 107 companies have issued EPS guidance. Of these 107 companies, 65 issued negative EPS guidance and 42 issued positive EPS guidance on average.

It is interesting to note there has been a significant decline in the number of companies issuing positive guidance in Q3 2012 relative to recent quarters. In fact, the current number of companies issuing positive guidance for Q3 2012 (21) is half of the average over the past five years (42). If the final number of companies issuing positive guidance for the quarter is 21, it will mark the lowest number recorded since FactSet began tracking guidance in Q1 2006.

Interestingly, given the above discussion on the consumer, Factset adds:

The Consumer Discretionary sector has witnessed the largest increase (+6) in the number of companies issuing negative EPS guidance and the largest decrease (-6) in the number of companies issuing positive EPS guidance in Q3 2012 relative to Q2 2012.

Since the start of the third quarter (June 30), analysts have reduced earnings growth expectations for Q3 2012 (to -2.8% from 2.1%) and for Q4 2012 (to 10.0% from 13.8%). For Q3 2012, analysts are now
projecting a year-over-year decline in earnings. Some companies have also taken down their estimates for the second-half of the year.


(…) Ahhh, the good old days. Now, a once-in-a-decade leadership shift is getting in the way of the stimulus-happy policies to which investors became accustomed. The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europe and the U.S. The upshot is that China’s 7.6 percent growth rate may fall more in the next 12 months than anyone expects. (…)

The saga speaks to the broader problems that China’s state-owned giants are having as they venture into the wider world. Resource projects account for most of the $380-billion of total Chinese outbound investment as of the end of 2011, according to China’s Ministry of Commerce. Losses on these investments have reached almost $27-billion, official media reports say.

Most of it has been blamed on failures to undertake proper research before deals are signed. “In many of these cases, my view is that due diligence was either poor, non-existent or there was an element of hubris involved,” says Mike Komesaroff, managing director of Queensland-based Urandaline Investments, a consultancy specializing in China’s minerals and metals industries.


For what it’s worth, the betting sites — legal in Ireland and Great Britain — predict we’ll wake up on Nov. 7 and find the GOP controls both houses of Congress, while Obama gets four more years in his present job. Following Romney’s acceptance speech, Intrade gave Obama a 56.8% chance of winning. For its part, Ladbrokes says that every five pounds you put down on him will net you £2 if he wins, while the potential payoff for an £8 wager on Mitt will net you £15.

What this supposedly implies, as more than one pundit has observed (and pundits are always coming up with brilliant insights) is an extended bout of gridlock. And while we gather that the patrons of the gambling sites have a decent record calling elections, which may tempt you to hazard a few bucks on this one, our sage advice is: Don’t bet on it.


Facebook Shares Drop to New Lows

Facebook shares fell 5% to new lows Friday as two analysts from firms that underwrote its initial public offering cut their price targets on the shares.

Analysts at Bank of America-Merrill Lynch and Bank of Montreal lowered their targets on Facebook 34% and 40%, respectively, though they cited different reasons for the cuts.

Facebook shares fell $1.03, or 5.4%, to $18.06—a new low—Friday. That puts the shares at about 53% below their initial public offering price of $38. (…)

Always beware when sell side analysts are “constructive”. This BoA “analyst” is “constructive on FB’s opportunity (!)… He does see that new ad formats are paramount for the stock although he would not commit himself on their likely success…

“We remain constructive on FB’s opportunity to drive an acceleration in revenue growth from new ad formats,” Mr. Post wrote Friday. “We see the success of new ad formats as paramount for the stock.” (…)

…when this BMO guy shows little optimism for revenue growth.

“We expect investor attention to return to fundamentals after the technical challenges presented by lockup expirations over the next six months have been absorbed by the stock,” said Mr. Salmon, who cut his target to $15—18% below Friday’s trading level—and reduced his third-quarter revenue target to flat. “Valuation is underpinned by revenue growth, and we believe flat 3Q sequential growth would be met with a step down.”

BoA was #4 on the FB underwriter list!

Meanwhile, the S&P 500 is up 9%! On pitiful volume. Wonder why?


NEW$ & VIEW$ (3 Feb. 2012)

Jan. Nonfarm Payrolls: +243K vs. consensus of +125K, +203K (revised) in Dec. Unemployment 8.3% vs 8.5% expected. Avg. hourly earnings +0.2%. to $23.29. Workweek unchanged at 34.5.


Much is being written these days about the Golden Cross which occurs when the 50-d moving average crosses above the 200-d m.a..

The most recent GC occurrences courtesy of Mark Hanna at Market Montage:

Barry Ritholtz posted on the GC and documented its significance.

The following two tables show the history of such events for the S&P Composite from 1930 to the present, including ALL 47 crosses where the 50 day moving average is rising and moves above the 200 day moving average. Note how the data after 1960 is much more bullish.

The first table tracks equities when the GC occurs while the 200-d m.a. is still falling which is the present case.

This table tracks equities when the GC occurs while the 200-d m.a. is rising.

Barry’s post provides lots of charts to peruse.



Earnings Beat Rate Ticks Higher

Early on during the current earnings season, the percentage of companies beating earnings estimates was in the low 50s, which would have been the lowest “beat rate” for a quarter since the financial crisis ended.  As more and more companies have reported, however, the beat rate has been creeping higher, and it currently stands at 60.7%.  As shown in the first chart below, 60.7% is not great, but it’s not a multi-year low either.

Typically during earnings season, the beat rate will start out high and then trickle lower.  The reverse is happening this earnings season, as shown in the second chart.


Corporate Tax Rate Is Lowest in Decades  Total corporate federal taxes paid fell to 12.1% of U.S. profits in the government’s latest fiscal year, the lowest level since at least 1972 and well below usual rates of around 25%. Most of the credit–or blame–goes to a temporary break to spur investment.


This tax break, known as “bonus depreciation,” has allowed companies to write off investments in goods like industrial equipment, manufacturing machinery and computers in the year in which they’re bought rather than over time. The White House estimates the subsidy has saved companies roughly $55 billion in corporate income taxes over each of the past two years.

Companies just reporting fourth-quarter earnings made clear they have aggressively taken advantage of the tax break, which lasted in full through December.


Banks Deplete Earnings Backstop

The rainy-day funds that U.S. banks have been tapping to boost their earnings could soon begin to dry up, and that doesn’t bode well for bank profits.

The top 10 U.S.-owned commercial banks released $4.3 billion in reserves in the fourth quarter, according to an analysis by The Wall Street Journal, boosting after-tax earnings by $3.5 billion. The analysis assumes that the income generated by the reserve releases was taxed at the same rate as the banks’ net income for the period. The latest-quarter releases accounted for nearly a quarter of the banks’ earnings, up from about 15% in the third quarter.

The releases are “masking some horrible operating performance,” said Mike Mayo, a banking analyst for Crédit Agricole Securities. “The bottom line is your earnings power is decreasing.”

FYI:   Panasonic warns of $10bn annual loss
Loss forecast nearly double Japanese group’s previous guidance



Continuing the monitoring of recessions calls made during 2011 by various people or organizations: while ECRI (Sept. 23: “recession imminent”) and John Hussman (Aug. 8: “Recession warning”) are both maintaining their call (although Hussman is now wavering), Credit Suisse has just capitulated as their recession model

which projects the probability of recession over the next six-months, has fallen to virtually zero (to be precise, 1%), from a local high of 35% in September 2011. Most of the variables in the model have moved in a positive direction in recent months, including the stock market, private-sector job growth, jobless claims, energy prices, housing permits, and consumer expectations.


Goldman Sachs plots the fiscal headwinds:




CoreLogic released its December Home Price Index (HPI®) report:

imageThe CoreLogic HPI shows that, including distressed sales, home prices in the U.S. decreased 4.7 percent in 2011 compared with December 2010.  The HPI excluding distressed sales shows that home prices decreased by 0.9 percent in 2011, giving an indication of the impact of distressed sales on home prices in 2011.

The report also shows that national home prices including distressed sales decreased 1.4 percent on a month-over-month basis, the fifth consecutive monthly decline. However, the HPI excluding distressed sales posted its first month-over-month gain since July 2011, rising 0.2 percent.

Will better employment outlook save housing? (Charts from ISI)

image image

Mortgage Rates Plumb New Lows

For the week ended Thursday, the 30-year fixed-rate mortgage averaged 3.87%, down from 3.98% the previous week and 4.81% a year ago. Rates on 15-year fixed-rate mortgages averaged 3.14%, down from 3.24% last week and 4.08% a year earlier.



Retailers Post Solid Sales

The 20 retailers tracked by Thomson Reuters together showed 4.2% growth in same-store sales for January. The figures compare with 4.8% growth recorded last year.


(…) the recent surveys of senior loan officer surveys released by the respective central banks reveal that conditions remain favorable in
North America: U.S. commercial banks have tightened a little bit while Canadian banks remain accommodative. In the Euro zone, the situation is very different. As shown, the net tightening of credit standards on non-financial corporations surged to the highest level since mid-2009. We would expect this development to impact the real economy more forcefully in the coming months. Even if the data have been “less bad” than expected this week for the euro zone, a recession is still unfolding in that part of the world.



It has long been a puzzle why there has not been a more severe run on bank deposits in the troubled economies during the crisis, since a break up of the euro would almost certainly involve a revaluation of bank deposits in Germany relative to those elsewhere. December’s money supply data suggest that this may have finally started to happen.

Bank deposits, presumably in the weak economies, fell by €25bn in the month. This may have forced banks to reduce their loan books to households and companies, which dropped by E 47 billion in December alone. If these trends were to continue, they would be truly ominous, not just for economic activity in the eurozone, but also for activity in many emerging countries, which are heavily dependent on credit from European based banks. (Gavyn Davies)

REAL RETAIL SALES IN EUROPE DECLINED 0.4% IN DECEMBER. Core sales dipped 0.1%, the same as in November. Since August 2011, real core retail sales have declined at a 2.2% annualized rate. (Eurostat)


Pointing up   Real retail sales dropped 1.4% in Germany in December, which followed a 1.0% decline in November. Since August, German total retail sales have declined at 5% annualized rate in real terms. That compares with a 0.5% gain in France (-0.3% in December) and a devastating 9.8% drop in Spain (-0.8% in December). December numbers for Italy and Greece are not yet available.



BANK STOCKS BELOW BOOK VALUES. But will book values keep falling?


Spain Coaxes Banks to Merge to Purge Losses

Economy Minister Luis de Guindos said late yesterday that banks have a year to make 50 billion euros ($66 billion) of provisions against real-estate assets. If they agree by the end of May to merge, they get a further 12 months to take the charges and can tap the state’s bank-bailout facility for funds.

Ireland’s central bank cuts growth forecasts  Eurozone debt crisis part of reason, it says


Barclays plans a 25-30% pay cut for the 24K employees in its investment banking unit, according to sources, and will also eliminate about 5% of the senior bankers in that group. This move follows similar action across the banking sector, both in the U.K. and this side of the pond.

Storm cloud    CANADIAN Jobless rate rises to 7.6% in January  Climbs 0.1 per cent to a nine-month high as the economy adds only 2,300 jobs during the month.

Canada has added 129,000 jobs over the past year, however the bulk of them were in the first six months of that period. Since last summer, job creation has been sluggish.


Non-manufacturing industries slow in Jan  China’s non-manufacturing business activity index, co-published by the National Bureau of Statistics and China Federation of Logistics and Purchasing (CFLP) on Friday, was 52.9 percent, 3.1 percentage points lower than the previous month.

Among the sub indexes, the order backlog index, stock index, intermediate input price index, subscription price index and business activity expectation index each picked up 1 to 2 percentage points; while the business activity index, new orders index, new export orders index, employment index and supplier delivery time index have decreased in various degrees.

How much is seasonality (Spring Festival)? We shall see in coming months.


Punch   U.S. Equities: The Total Return Trap (BCA Research)

High dividend yields hold appeal in a sluggish economic environment. But, investors should be wary of overpaying dividend streams in overvalued groups.

The Fed stretched out its zero-rate expectations even further last week, reaffirming that low interest rates will remain a key feature of the investment environment. This would seem to continue to favor high-income-generating assets, but our U.S. Equity Strategy recommends that investors should be selective when looking for total return plays.

Valuations of traditionally high-yielding equities are well beyond levels justified by underlying earnings. For example, equity fixed income proxies like utilities, telecoms and REITs are overvalued according to our industry valuation models.

On the other hand, pharmaceuticals, integrated oils and hypermarket equities offer a high yield at prices that are not demanding versus their own relative valuation histories. Also, these equity groups (unlike the traditional high yielding ones) offer protection should long-term Treasury yields rise on the back of positive economic surprises. Bottom line: Traditional high yielding equity sectors have very demanding valuations, and investors seeking total return should consider other less popular yield plays, including pharmaceuticals, hypermarkets and integrated oil & gas.


NEW$ & VIEW$ (18 Oct. 2011)

Fingers crossed   “THE COMPREHENSIVE PACKAGE”: As we approach the dreadful weekend, expectations are getting lower and lower. A few quotes:

“We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”

Wolfgang Schäuble, Germany’s finance minister, said there would be no “definitive solution” but expected a deal to use an enhanced EFSF in “the most efficient way”. It is unclear whether such plans breach last month’s ruling by Germany’s top court, which said the Bundestag may not transfer “fiscal responsibilities” to EU bodies or take on “incalculable” liabilities beyond German control. Any change would need a new constitution and a popular vote.

Berlin’s DIW institute, one of Chancellor Angela Merkel’s five official advisers, said attempts to boost the €440bn (£384bn) EFSF bail-out fund – possibly to €2 trillion – with guarantees to shore up southern Europe would be “poisonous” for France’s credit worthiness.

Pointing up   Der Spiegel runs a good article that pretty well wraps up the situation, placing all the pressure on fence-loving Mrs. Merkel:

The head of Deutsche Bank is raging against politicians, Berlin is raging against Paris and the north is raging against the south. The world is expecting decisive results at this weekend’s EU summit on emergency measures to shore up the euro, but the Europeans remain split. Will German Chancellor Angela Merkel finally take the lead?


Smile   China’s economy remains remarkably stable amid the considerable economic and financial problems throughout the world. China’s third-quarter gross domestic product was +9.1% YoY, slowing from +9.5% in Q2 and +9.7% in Q1.Electricity consumption trends confirm the relatively stable GDP growth rate.

[AM-AP816_CHINAH] image

China’s economy expanded 2.3% on a quarterly basis in the July-September period. In September, retail sales expanded 17.7% YoY, following an increase of 17% in August. Industrial value-added output rose 13.8% YoY in September, up from the 13.5% growth in August. Fixed assets investment rose 24.9% YoY in the first nine months, compared with a 25% gain in the January-August period.

But there is a slowdown and it may be accelerating, unsurprising given what’s happening to China’s major clients. The Composite PMI and the OECD LEI for China point to a more pronounced slowdown:


Domestically, housing is clearly slowing. Also, in the past three quarters, urban and rural residents’ per-capita disposable income rose 13.7% YoY. After deducting inflation, actual growth was 7.8%. The growth of per-capita cash income of rural residents hit 20.7%.

Storm cloud  Fair figures disappoint  The number of buyers on the opening day of the Canton Fair, officially known as the China Import and Export Fair in Guangzhou, Guangdong Province on Saturday were down on what they were last year, exporters say.

I don't know smile   US MANUFACTURING BOTTOMING OUT? The Empire State Manufacturing Survey indicates that conditions for New York imagemanufacturers continued to deteriorate in October. The general business conditions index remained negative and, at -8.5, was little changed.

After a series of negative readings
from June through September, the
new orders index rose to 0.2 in
—an indication that orders were unchanged after declining for a number of months.



Price increases moderated. The index for number of employees rose several points but was at a relatively low level of 3.4, while the average workweek index was negative for a fifth consecutive month.

Storm cloud   UNINTENDED CONSEQUENCES OR COLLATERAL DAMAGE?: The Fed’s QEs and lower dollar policies have contributed to higher commodities and other import prices, thereby reducing consumer purchasing power.

Overall U.S. import prices rose 0.3% during September after a 0.2% August decline. Year-to-year, the lower value of the U.S. dollar as well as higher oil prices have raised prices for imported products by 13.4%. Non-oil import prices rose 0.2% and by 5.5% y/y. Some imports saw big price gains YoY: Imported food & beverage prices (+14.4% y/y), non-oil industrial supplies (15.8%),  apparel prices (9.1%), furniture prices (5.9%), and imported autos (+3.7%). (Chart from Haver Analytics)

Imports from China, also influenced by the yuan appreciation (+30% since mid-2005), have seen their prices rise 3.8% in the last 12 months. No more deflationary contribution from China.

Storm cloud   SPEAKING OF IMPORTS AND CHINA, China’s imports decline of 0.2% MoM in September was weaker than seasonality would have suggested, a further confirmation that China is slowing. Of note, ISI China sales survey has broken down in recent weeks.

image   image

Storm cloud   France pledges to defend triple-A rating Finance minister admits 2012 growth forecast of +1.7% ‘probably too high’.
Storm cloud   German economic expectations deteriorated to approach a three-year low in October.

The ZEW index fell for the eighth consecutive month to minus 48.3 from September’s reading of minus 43.3. The last time the indicator was this low was in November 2008. The current-conditions index fell to 38.4 from September’s 43.6, which was the lowest reading since July last year.

Lightning   Spanish House Prices Plunge Spain’s government said that housing prices remained in free-fall in the third quarter.


Lightning   CPI rose from 4.5pc in October to 5.2pc in September, while RPI was 5.6pc, up from 5.2pc.U.K. Inflation Continues Rise U.K. inflation accelerated to match a record of 5.2% in September, stoked by big increases in the prices households pay for gas and electricity. The retail price index rose to 5.6%, the highest in over 20 years.




Light bulb   ARE STOCK DIVIDENDS BLINDING investors to valuations? That’s what research by AllianceBernstein contends. (Barron’s)

Vadim Zlotnikov, chief market strategist at the research shop, ranked the large cap universe of 650 stocks by their dividends. He compared the stocks in the top quintile with those at the bottom using both price to book and price to forward earnings. The result: The premium of high-dividend payers over low-dividend payers is the highest it has been over the past 40 years.

“The high-dividend trade is the most crowded trade in the world,” Zlotnikov argues. Conversely, deep-value, cyclical stocks are the most undervalued.

As always trends continue until they don’t, and that’s usually longer than expected. (…) within the dividend-paying universe, those in the utilities, staples and telecom sector are far more expensive than those dividend payers in energy, health care and defense.

Freezing   COWARDLY BULLISH!:  Barton Biggs Raises Bullish Bets to 65% of Macro Fund

I’m inclined to stay where I am, which is moderately, cowardly bullish. The thing that makes me want to hang in there is that the high frequency economic news from the U.S. has definitely improved. It’s gotten pretty good.

One-Year Chart for Citigroup Economic Surprise Index - United States (CESIUSD:IND)A case in point is Citigroup’s Economic Surprise Index for the US which turned positive last week. Economic news recently got marginally better but the Index’ rise occurred mainly because economists have ratcheted down their excessive expectations of last spring/summer.

But what is it that has “gotten pretty good”?

  • US VEHICLE SALES, up nicely in September but only to last April’s level. Nice but unconvincing.image
  • MANUFACTURING PMI, +1 to 51.6. However, new orders were flat at 49.6.
  • NON-MANUFACTURING PMI, -0.3 to 53.0 but new orders improved nicely.
  • CONSTRUCTION SPENDING rose 1.4% in August which only erased July’s 1.4% drop. This stat is terribly weak being so dependent on housing.
  • EMPLOYMENT. The 103k gains surprised economists, but what else is new? After netting out the Verizon strike numbers, total employment was 56k in September, down from 102k in August, itself down from 127k in July. Not a friendly trend! Also, the 444k increase in “involuntary part-timers” is huge. These people’s take-home-pay just got slashed.
  • US RETAIL SALES: a big surprise, no doubt about it. Can it be sustained in light of the above?
  • CREDIT MANAGERS INDEX. Same as for Retail Sales.
  • UNEMPLOYMENT CLAIMS, slowly improving.

Meanwhile, real wage gains remain negative, inflation has yet to slowdown, Americans are deleveraging and the fiscal drag is intensifying. Europe is in recession, eying depression, while Asia is catching the Western flu. “Pretty good”? Not quite, in my estimation. I prefer to remain cowardly cautious.

Pointing up   EARNINGS



Punch   Technicians note that 1225 is an important hurdle. More significant in my view is the 1276 and falling 200-DMA.

Pointing up   Note that Apple accounts for nearly 100 of the 135 point gain in the Nasdaq 100 this year, four times greater than AMZN, the next best contributor.

Pointing up   Also, this am WSJ talks about the limited liquidity in this market (Traders Warn of Market Cracks):

LIQUID“That’s why you get 5% moves in a matter of minutes,” he says. “When there are sellers, there are few buyers, creating an air pocket down.” And it’s not just stock markets. Liquidity has also been sucked out of credit markets, too, traders say, from corporate bonds to mortgage-backed securities.


Wilted rose   Gold market suffering ‘very real damage,’ Gartman warns

Gold bars are displayed at the headquarters of Mitsubishi Materials Corp. in Tokyo.“The rally was always disconcertingly tepid; that is, after a vicious decline such as that seen in late August until late September, the bounce, if the market is truly healthy, should have been even more vigorous. It was not, and indeed if anything it was tepid, quiet and placid,” the publisher of the Gartman letter said today.

“Tepid placidity all too often gives way to vigorous selling sooner rather than later.”



FT Alphaville:

We aren’t big fans of technical analysis, but a lot of people are — which is why the following is generating a lot of interest in the City.

It’s called a death cross and it’s triggered when the 50-day moving average crosses below the 200-day average. Apparently if you had followed the “sell” signals generated by this analysis going back five years, the P&L gain would have been 56 per cent.

However, there’s plenty of past evidence to suggest a different outcome, and given the speed of market moves in both directions last week, we aren’t sure what, if anything, can be read in the runes. Also shouldn’t the 200 day average be falling in a real death cross?

Still, it sounds scary.

Ian McAvity says the following of the death cross:

I view this as a lagging, trend confirmation tool. There are often sharp rallies back up to the intersection level to work off initial oversold conditions that pushed the 50-Day downwards. It didn’t follow through when it occurred a year ago. That could occur again, but that’s not a bet I would make.


Ian points out that in his last issue, he

noted the “death cross” on 10 Year yields, suggesting that rates were heading down…contrary to popular opinions cited in the media.




I. Bernobul posted this illuminating piece today:

I don’t know Peter Brandt at all. I stumbled on this post, caught as planned by the scary headline “Charts indicate a 75% decline in the U.S. stock market is possible”.

I have always been amazed by technical analysts, the way they see patterns and stuff out of charts, much like some people see faces or animals in mountain flanks, and, armed with there analysis and slick use of words, “proclaim” forthcoming market trends. Not unlike most of his peers, Peter’s analysis is fascinating, yet useless by his own admission (my emphasis):

Read the complete post here.



In my June 2 post BEAR FEEDING SEASON NOW OPEN: DON’T BUY THE DIPS, I raised the possibility that the S&P 500 Index might decline another 14% to 1140 if double dip fears brought PEs to the 20% undervaluation level reached in previous large corrections.

Chris Kimble sees a similar risk from another, although quite related, angle:

Since 2007, when support was taken out on the 10-year yield, the S&P 500 fell at least 15% in the next 90 days.  With yield support breaking again, will stocks play a game of “Ketch-Up” to yields?